Cerus Corporation — Form 10-Q Summary
Business context and reporting period
Cerus develops and commercializes the INTERCEPT Blood System for pathogen inactivation of blood components. Platelet and plasma systems were marketed in Europe, the CIS, the Middle East and selected other countries; the red blood cell system remained in development. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Financial performance and position
| Metric | Three months ended Sept. 30, 2011 | Three months ended Sept. 30, 2010 | Nine months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2010 |
|---|---|---|---|---|
| Total revenue | $9.2 million | $5.0 million | $22.6 million | $16.6 million |
| Product revenue | $7.8 million | $4.5 million | $20.7 million | $15.7 million |
| Government grants | $1.5 million | $0.5 million | $1.9 million | $0.9 million |
| Gross profit | $4.6 million | $2.7 million | $10.5 million | $8.2 million |
| Gross margin | 49.7% | 53.4% | 46.6% | 49.4% |
| Loss from operations | $(2.6) million | $(3.5) million | $(12.3) million | $(11.4) million |
| Net income (loss) | $2.3 million | $(3.6) million | $(9.0) million | $(14.5) million |
| Net income (loss) per diluted share | $0.05 | $(0.09) | $(0.19) | $(0.37) |
Product gross margin was 40% in the third quarter and 42% for the first nine months, compared with 49% and 46%, respectively, in the prior-year periods. Management attributed pressure partly to supplier costs, including $0.5 million of contractual minimum-purchase fees during the 2011 periods.
- Research and development expense increased 41% to $1.8 million in the quarter and 49% to $5.6 million for the nine months, primarily due to red blood cell system development.
- Selling, general and administrative expense increased 6% to $5.4 million in the quarter and 9% to $17.1 million for the nine months, primarily reflecting expanded European marketing activities.
- The third-quarter net profit was substantially affected by a $5.4 million non-cash gain from revaluation of warrant liabilities. The nine-month gain was $3.8 million.
- Net cash used in operating activities was $14.5 million for the nine months, compared with $10.2 million in 2010. Inventory increased to $9.6 million from $6.0 million at December 31, 2010, supporting anticipated demand and supply-chain requirements.
- Cash and cash equivalents were $14.8 million at September 30, 2011, compared with $28.9 million at December 31, 2010. Cash, cash equivalents and short-term investments totaled $15.2 million.
- Working capital declined to $16.5 million from $22.1 million at year-end 2010. Total assets were $36.6 million and stockholders’ equity was $16.2 million at September 30, 2011.
Debt, liquidity and financing
- In September 2011, Cerus entered into a Comerica credit agreement providing for up to $8.0 million of growth capital loans and a revolving line of credit of up to $4.0 million, subject to a $10.0 million aggregate borrowing limit.
- Cerus borrowed $5.0 million under Growth Capital Loan A at a fixed rate of 6.37%, with interest-only payments for the first 12 months and maturity in 48 months. Substantially all proceeds repaid the prior Oxford debt.
- The revolving line was undrawn at September 30, 2011. The agreement requires a minimum cash balance of $2.5 million and minimum revenue performance based on a six-month trailing measurement. Cerus was in compliance at quarter-end.
- Debt and other contractual obligations totaled approximately $12.0 million, including $5.9 million of long-term note obligations, $2.9 million of minimum purchase commitments, $1.8 million of operating leases and $1.5 million of other commitments.
- Management stated that product sales, government grants, available cash and debt access were expected to fund requirements for at least the next twelve months, while warning that additional capital could be needed sooner if assumptions prove inaccurate.
Material changes, outlook and risks
- Total revenue increased 85% in the quarter and 36% for the nine months. Product revenue growth reflected higher disposable-kit volume, increased market penetration and new customers, partly offset by lower illuminator volume.
- Government grant revenue increased by $1.0 million in both the quarter and nine-month period. In August 2011, Cerus received a $2.1 million Department of Defense grant for red blood cell system development, recognized as qualifying costs are incurred over one year.
- Management expected product revenue to increase as market acceptance expands, but noted that quarterly results may not be indicative of future revenue and that profitability depends on broader adoption.
- Research and development spending was expected to increase in the near term for red blood cell development and potential regulatory approvals, while SG&A spending was expected to remain around current levels to conserve cash.
- Key risks include continued operating losses and negative operating cash flow; dependence on additional financing, government grants and market acceptance; regulatory uncertainty, including the need for further clinical work for U.S. approval; reimbursement and customer-budget constraints; foreign-exchange volatility; reliance on Fenwal and other sole-source suppliers; inventory expiration or obsolescence; competition; product liability; intellectual-property claims; and potential covenant breaches.
- The company relies on Fenwal to manufacture platelet and plasma disposable kits through December 31, 2013, and pays royalties ranging from 3% to 10% of applicable product sales, plus 6.5% on illuminator sales.
- No legal proceedings were reported. Management concluded that disclosure controls and procedures were effective as of September 30, 2011.
Investor verification checklist
- Verify whether revenue growth and European market adoption continued without reliance on unusually large customer orders or government reimbursements.
- Reconcile cash burn, inventory growth and the company’s stated expectation that liquidity would cover at least twelve months of requirements.
- Review Comerica loan covenants, collateral provisions, repayment schedule and the availability of the undrawn loan and revolving facilities.
- Separate operating performance from the non-cash warrant-liability gain when assessing profitability and valuation.
- Track product gross margin, supplier minimum-purchase costs, Fenwal manufacturing economics and royalty obligations.
- Assess regulatory and clinical milestones for the red blood cell system and potential U.S. approvals for existing systems.
- Evaluate potential dilution from the $20.0 million at-the-market facility, outstanding warrants, options and convertible preferred stock.