Cerus Corporation 2018 Form 10-K Summary
Business context and reporting period
Cerus develops and commercializes the INTERCEPT Blood System, a pathogen-reduction technology for donated platelets, plasma and red blood cells. The platelet and plasma systems were commercialized in the U.S. and selected international markets; the red blood cell system remained investigational. This Form 10-K covers the fiscal year ended December 31, 2018, with unaudited fourth-quarter data also disclosed.
As of December 31, 2018, Cerus had 240 employees and operated as one blood-safety segment. The company filed for European CE Mark approval of its red blood cell system in December 2018.
Financial results and key metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Product revenue | $60.9 million | $43.6 million | +40% |
| Government contract revenue | $15.1 million | $7.8 million | +95% |
| Total revenue | $76.1 million | $51.3 million | +48% |
| Gross profit on product revenue | $29.3 million | $21.0 million | +39% |
| Product gross margin | 48% | 48% | Stable |
| Operating loss | $(55.0) million | $(57.5) million | Improved $2.5 million |
| Net loss | $(57.6) million | $(60.6) million | Improved $3.0 million |
| Basic and diluted loss per share | $(0.44) | $(0.56) | Improved |
| Cash used in operating activities | $(31.2) million | $(52.2) million | Improved $21.0 million |
FY 2018 total revenue included approximately $60.9 million of product revenue and $15.1 million reimbursed under the BARDA agreement. Product revenue growth was driven primarily by European disposable-kit sales, including the nationwide platelet-system rollout in France, and increased U.S. platelet-system sales. France represented 38% of product revenue, compared with 22% in 2017.
Research and development expense increased 26% to $42.6 million, while selling, general and administrative expense increased 8% to $56.8 million. Operating margin was approximately negative 72%, and net margin was approximately negative 76%, based on total revenue. Interest expense increased to $4.0 million from $3.0 million.
Fourth-quarter 2018 results
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Product revenue | $16.5 million | $16.2 million |
| Gross profit on product revenue | $8.1 million | $7.1 million |
| Government contract revenue | $3.7 million | $2.4 million |
| Net loss | $(16.2) million | $(11.5) million |
| Basic and diluted loss per share | $(0.12) | $(0.10) |
Fourth-quarter total revenue was approximately $20.2 million. Product gross margin was approximately 49%. The quarterly net loss increased year over year despite higher revenue and gross profit.
Liquidity, debt and financing
- Cash, cash equivalents and short-term investments totaled $117.6 million at December 31, 2018, including $28.9 million of cash and cash equivalents and $88.7 million of short-term investments.
- Working capital was $94.2 million, compared with $66.8 million at December 31, 2017.
- Total debt under the Oxford Finance agreement was approximately $29.9 million, with an interest rate of approximately 9.53% at year-end. The debt is secured by substantially all assets other than intellectual property and 35% of the investment in Cerus Europe B.V.
- Debt principal and interest payments totaled approximately $37.8 million through 2022, including $10.4 million due in 2019.
- Contractual obligations totaled approximately $100.3 million, including debt, minimum purchase commitments, manufacturing and development obligations, operating leases and other commitments.
- Cerus raised approximately $57.2 million net in a January 2018 public offering and approximately $27.9 million net through its Cantor at-the-market program. Approximately $41.6 million remained available under the Cantor program at year-end.
Management stated that available liquidity, expected product sales and anticipated BARDA reimbursements should satisfy capital requirements for at least the next twelve months, but emphasized that this assessment depends on assumptions regarding revenue, BARDA funding and access to capital markets.
Material changes versus the prior comparable period
- Product revenue increased 40%, led by France and U.S. platelet-system adoption; average selling prices to the largest customers declined.
- BARDA revenue nearly doubled to $15.1 million as eligible red blood cell development costs increased.
- Operating and net losses narrowed modestly, but Cerus remained significantly unprofitable and continued to consume cash from operations.
- Operating cash burn improved substantially, partly due to higher sales and BARDA reimbursements and the timing of receivable collections, inventory purchases and research expenditures.
- Cash and investments increased materially following equity financings, while debt remained approximately flat.
- The company accelerated its remaining Fresenius manufacturing and development payment of approximately €5.5 million to August 2019; approximately $5.9 million was accrued at year-end.
- Cerus entered into a new headquarters lease commencing March 2019 and recorded $6.9 million of construction-in-progress related to leasehold improvements at year-end.
- The company adopted ASC Topic 606 without a material impact on its financial statements.
Guidance, outlook, risks and unusual items
- Management expected product revenue to increase as U.S. adoption expanded and international commercialization continued, but warned that euro-dollar exchange rates and customer adoption could materially affect results.
- 2019 commercial priorities included expanding utilization at existing U.S. blood-center customers, increasing production of treated platelet and plasma units, pursuing extended-storage cryoprecipitate, and continuing regulatory and clinical development.
- The red blood cell program required completion of the RedeS and ReCePI studies, additional U.S. clinical development for chronic anemia, manufacturing validation and further regulatory approvals. No red blood cell approval was expected before 2020, if ever.
- BARDA had committed approximately $103.2 million under the base period and exercised options, with potential total funding of up to $201.2 million. Additional funding was discretionary and BARDA could terminate the agreement for convenience.
- Manufacturing dependency is concentrated: Fresenius was the sole supplier of key disposable kits, while other suppliers were sole qualified sources for compounds, adsorption components and illuminators. Component obsolescence and qualification of alternatives could cause delays, added costs or supply shortages.
- Cerus conducted voluntary recalls in 2018 involving specified lots of platelet kits in Europe and the U.S. The company also reported leakage incidents in France under investigation with the French regulator.
- The company continued to expect substantial losses and may require additional equity, debt, partnership or government funding. Additional equity financing could dilute shareholders.
- The company remains exposed to regulatory approval, reimbursement, clinical-trial, product-liability, intellectual-property, foreign-exchange, cybersecurity, earthquake and healthcare-policy risks.
- At December 31, 2018, disclosure controls and internal control over financial reporting were assessed as effective, and Ernst & Young issued unqualified audit opinions.
Most important facts for investors to verify
- Whether U.S. blood-center adoption of the platelet and plasma systems accelerates sufficiently to reduce operating losses and cash burn.
- The sustainability and pricing of the French national rollout, which accounted for 38% of FY 2018 product revenue and had no purchase-volume commitment.
- Progress, enrollment and safety results for the RedeS and ReCePI trials and the status of the red blood cell system’s CE Mark application.
- Actual BARDA option exercises, reimbursement collections, audit adjustments and the risk of reduced, delayed or terminated funding.
- Supply continuity and regulatory approval of alternate plastics, illuminator components and other sole-source materials.
- The effect of the 2018 product recalls and French kit-leakage investigation on customer retention, regulatory compliance and future sales.
- Liquidity after the $5.5 million Fresenius payment due in 2019, scheduled debt amortization and ongoing annual operating cash consumption.
- Potential dilution from the remaining Cantor at-the-market capacity, outstanding options and restricted stock units.