Cerus Corporation 2021 Q2 Form 10-Q Summary
Business Context and Reporting Period
Cerus develops and commercializes the INTERCEPT Blood System for pathogen reduction of blood components. Commercial products include platelet and plasma systems, illuminators, and related services; the company also received FDA approval for its cryoprecipitation system in November 2020 to produce INTERCEPT Fibrinogen Complex and pathogen-reduced plasma. The red blood cell system remains under development.
This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Cerus operates in one blood-safety segment.
Financial Performance and Liquidity
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Product revenue | $31.5 million | $21.5 million | $54.9 million | $40.1 million |
| Government contract revenue | $6.3 million | $5.3 million | $12.5 million | $11.4 million |
| Total revenue | $37.8 million | $26.8 million | $67.3 million | $51.5 million |
| Gross profit on product revenue | $16.2 million | $11.8 million | $28.4 million | $22.1 million |
| Product gross margin | 51% | 55% | 52% | 55% |
| Loss from operations | $(14.4) million | $(14.6) million | $(30.8) million | $(30.0) million |
| Net loss | $(15.4) million | $(14.9) million | $(32.8) million | $(31.3) million |
| Net loss per share | $(0.09) | $(0.09) | $(0.19) | $(0.19) |
- Q2 total revenue increased 41%; product revenue increased 46%. Six-month total revenue increased 31%, while product revenue increased 37%.
- Product revenue growth was primarily driven by higher U.S. platelet-system kit volumes, increased plasma-system sales in Europe and the Middle East, and favorable Euro translation.
- Product gross margin declined because of unfavorable product mix and foreign-exchange effects.
- Research and development expense increased 9% in Q2 and 4% year to date, primarily due to the red blood cell program, product enhancements, expanded platelet-label initiatives, and illuminator development.
- Selling, general and administrative expense increased 23% in Q2 and 22% year to date, driven principally by stock-based and incentive compensation and investment in the IFC commercial launch.
- Net cash used in operating activities was $26.1 million for the six months ended June 30, 2021, compared with $27.7 million in the prior-year period. Inventory investment was $8.0 million and contributed to operating cash use.
- Investing activities provided $31.2 million, primarily from investment maturities and sales. Financing activities provided $17.6 million, including a $15.0 million term-loan draw.
- Cash, cash equivalents, short-term investments, and restricted cash totaled $125.1 million at June 30, 2021, versus $135.9 million at December 31, 2020. Working capital was $119.8 million, compared with $123.5 million at year-end.
- Total debt was $64.0 million at June 30, 2021, consisting of $55.0 million of term-loan principal and $9.3 million drawn under the revolving facility. The term loan had an effective interest rate of approximately 7.50% and matures in 2024. The company was in compliance with its debt covenants.
- Stockholders’ equity declined to $84.2 million from $103.8 million at December 31, 2020, principally reflecting year-to-date net losses.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated, led by U.S. commercial adoption and higher disposable-kit sales.
- Despite revenue growth, gross margin fell three percentage points for both the quarter and year-to-date period.
- Operating and net losses remained substantial; the six-month net loss increased by $1.5 million.
- Debt increased by approximately $15.9 million from year-end, reflecting the $15.0 million second tranche under the term loan and higher revolving borrowings.
- Inventory increased from $23.3 million at December 31, 2020 to $31.3 million at June 30, 2021 to support anticipated demand and supply availability.
- In June 2021, stockholders approved increasing authorized common shares from 225 million to 400 million and increased the equity incentive plan authorization by 7.6 million shares.
- The company entered into a new or expanded BARDA commitment in June 2021, increasing committed funding to up to $126.5 million and potential total funding to $223.5 million through December 31, 2023, subject to options, milestones, and government decisions.
- The filing corrects an immaterial prior-period cash-flow classification error related to foreign-currency movements; the six-month 2020 comparative presentation was adjusted by approximately $0.1 million between operating cash flow and the exchange-rate line.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- No formal full-year revenue or earnings guidance is provided. Management expects product revenue to increase based on continued U.S. expansion, broader INTERCEPT adoption, and commercialization efforts in additional geographies.
- Management planned a limited 2021 U.S. launch of IFC to hospital customers. Initial commercialization is constrained by the need for manufacturing-partner validation and FDA biologics-license approvals for broader interstate distribution.
- Management expects government-contract revenue to remain materially consistent with historical trends, although BARDA funding depends on milestones, exercised options, allowable costs, and government continuation decisions.
- The red blood cell system has not been commercialized. The company completed resubmission of its European application under the MDR but did not expect a regulatory decision until 2022, if ever. U.S. studies and enrollment remain exposed to COVID-19-related delays.
- COVID-19 could adversely affect customer implementation, hospital access, clinical-trial enrollment, employee availability, manufacturing, supply chains, and access to capital.
- Cerus relies heavily on Fresenius and other third-party or sole-source suppliers. After the reporting period, in July 2021, Nova notified Cerus that it would not renew the illuminator manufacturing agreement; Nova was completing a final build of the current illuminator model while Cerus works on a redesigned model.
- Key contractual exposures include $25.5 million of short-term and $3.0 million of long-term purchase commitments, approximately $17.8 million of present-value operating lease liabilities, and scheduled term-loan principal payments of $41.25 million in 2023 and $13.75 million in 2024.
- The company continues to expect losses and states that additional capital may be required if product revenue, BARDA funding, or access to debt and equity markets is insufficient. It had up to $100 million available under an at-the-market equity sales agreement but sold no shares under it during the first six months of 2021.
- Major risks include regulatory approval and post-approval requirements, market adoption and reimbursement, customer concentration, foreign-exchange volatility, product liability, intellectual-property disputes, supplier interruptions, debt covenants, and dependence on government contracts.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no reported material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether U.S. platelet-system adoption and the October 1, 2021 FDA platelet-safety compliance date translate into sustained recurring kit demand.
- The timing, geographic scope, manufacturing economics, reimbursement, and adoption of the IFC launch.
- Whether BARDA exercises additional options and reimburses expected costs, particularly for the red blood cell program.
- Progress, enrollment, safety data, and regulatory outcomes for the RedeS and ReCePI studies and the European MDR submission.
- The effect of Nova’s illuminator non-renewal notice, component obsolescence, inventory availability, and timing of a redesigned illuminator approval.
- Gross-margin trends as product mix, foreign exchange, manufacturing costs, and inventory levels change.
- Cash-burn rates, debt repayments beginning in 2023, covenant compliance, and the timing or need for additional equity or debt financing.
- Exposure to Fresenius and other sole-source suppliers, including the $28.5 million of disclosed purchase commitments.