Cerus Corporation Form 10-Q Summary
Business Context and Reporting Period
Cerus Corporation develops and commercializes the INTERCEPT Blood System for pathogen reduction in blood components. The platelet and plasma systems were marketed in Europe, the Commonwealth of Independent States, and the Middle East; the red blood cell system remained in clinical development. This quarterly report covers the three and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods. The financial statements are unaudited and presented in accordance with U.S. GAAP.
Financial Results and Key Metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Product revenue | $10.2 million | $9.2 million | $19.9 million | $17.9 million |
| Total revenue | $10.2 million | $9.2 million | $19.9 million | $18.0 million |
| Gross profit on product revenue | $4.4 million | $3.7 million | $9.0 million | $6.8 million |
| Product gross margin | 43% | 40% | 46% | 39% |
| Loss from operations | $(7.1) million | $(4.8) million | $(12.1) million | $(9.4) million |
| Net loss | $(6.7) million | $(1.9) million | $(17.0) million | $(10.7) million |
| Net loss per basic share | $(0.10) | $(0.04) | $(0.26) | $(0.20) |
| Net cash used in operating activities | Not separately reported | Not separately reported | $(14.0) million | $(9.3) million |
Research and development expense was $3.5 million in the second quarter and $6.2 million year to date, up 105% and 76%, respectively. Selling, general and administrative expense was $8.0 million in the quarter and $14.8 million year to date, up 19% and 17%, respectively.
At June 30, 2013, cash and cash equivalents were $58.2 million, compared with $26.7 million at December 31, 2012. Working capital was $51.4 million, compared with $18.4 million at year-end. Total assets were $82.5 million and stockholders' equity was $54.9 million.
Total debt was $2.2 million, consisting of borrowings under the Comerica revolving line of credit. The $5.0 million Growth Capital Loan was repaid in April 2013. The revolving line of credit was scheduled to mature on June 30, 2014, and carried a 4.75% floating interest rate at quarter-end.
Material Changes Versus the Prior Comparable Period
- Product revenue increased 10% in the quarter and 11% for the six-month period, primarily from higher disposable-kit volumes and adoption by new customers.
- Gross margins improved to 43% for the quarter and 46% year to date, primarily because of lower manufacturing-overhead absorption associated with higher production volumes.
- Operating losses widened as research and development spending increased for red blood cell clinical trials and potential U.S. regulatory submissions, while SG&A also increased.
- Six-month net loss increased by $6.2 million, partly reflecting a $4.4 million non-cash loss from revaluation of the warrant liability, compared with a $0.8 million non-cash loss in 2012.
- Operating cash use increased by $4.8 million year over year. Financing cash inflows increased to $45.7 million, driven by equity offerings and partially offset by debt repayment.
- The company completed a March 2013 public offering generating approximately $38.0 million in net proceeds and sold approximately $13.0 million of stock under the Cantor at-the-market agreement during the first quarter.
- The warrant liability increased to $10.3 million from $5.9 million at December 31, 2012, primarily from changes in fair value. The liability is subject to significant valuation-model assumptions and stock-price volatility.
Guidance, Outlook, Risks, and Unusual Items
- Management expected product revenue to continue increasing as market acceptance expands, but cautioned that historical revenue trends may not be indicative of future results.
- Research and development spending was expected to increase because of two European Phase III red blood cell trials, additional studies, and modular PMA submissions for the plasma and platelet systems.
- The FDA approved the proposed modular PMA shell for the plasma system in March 2013. The FDA indicated that existing clinical and European haemovigilance data could support a modular platelet submission without additional Phase III trials at that time, but post-marketing studies would be required.
- Management stated that cash from product sales, existing cash, and access to debt was expected to fund requirements for at least the next twelve months. The company continued to expect operating losses and stated that additional capital would be required for further red blood cell development and potential regulatory activities.
- Key risks include failure to achieve broad market adoption or reimbursement, regulatory delays or additional clinical requirements, continued operating losses, dependence on Fresenius and other sole-source suppliers, product defects or recalls, inventory obsolescence, foreign-exchange exposure, competition, intellectual-property disputes, and the need for additional financing.
- Fresenius manufacturing and supply arrangements for finished disposable kits were scheduled to run through December 31, 2013, subject to renewal provisions. Minimum purchase commitments totaled $6.3 million.
- The company reported no legal proceedings and no off-balance-sheet arrangements. Disclosure controls and procedures were evaluated as effective as of June 30, 2013.
Important Facts for Investors to Verify
- Whether revenue growth and improved gross margins persist as customer adoption expands and manufacturing volumes change.
- The pace and cost of FDA modular PMA submissions, post-marketing commitments, and any additional clinical or regulatory requirements.
- Cash-burn trends relative to the $58.2 million cash balance and management's twelve-month liquidity assessment.
- The June 30, 2014 maturity and covenant requirements of the $2.2 million revolving credit facility.
- The valuation and potential future earnings volatility associated with the $10.3 million warrant liability.
- Renewal or replacement of the Fresenius manufacturing arrangement and the company's exposure to sole-source suppliers and minimum purchase commitments.
- Potential dilution from the Cantor equity facility, the remaining shelf-registration capacity, stock options, and outstanding warrants.
- The extent to which the company's continuing losses and planned clinical programs will require additional equity, debt, or partnership financing.