Cerus Corporation 10-Q Summary: Second Quarter 2015
Business Context and Reporting Period
Cerus Corporation develops and commercializes the INTERCEPT Blood System for pathogen reduction of blood components. The platelet and plasma systems were FDA-approved in December 2014 and were entering the U.S. commercial launch phase during the quarter. The red blood cell system remained in development. This filing covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $8.8 million vs. $8.6 million | $16.5 million vs. $16.5 million |
| Gross profit | $1.8 million vs. $3.8 million | $4.8 million vs. $7.6 million |
| Gross margin | 20% vs. 45% | 29% vs. 46% |
| Loss from operations | $15.5 million vs. $11.0 million | $29.9 million vs. $20.2 million |
| Net loss | $16.0 million vs. $7.6 million | $25.4 million vs. $7.8 million |
| Net loss per share | $0.17 basic; $0.17 diluted | $0.27 basic; $0.30 diluted |
| Cash used in operations | Not separately provided | $30.5 million vs. $19.4 million |
- Revenue increased 3% in the quarter and was essentially flat for the six-month period. Higher unit sales were largely offset by approximately 19% Euro depreciation against the U.S. dollar.
- Cost of revenue increased 48% in the quarter and 32% year to date, driven by foreign-exchange effects on inventory costs, higher manufacturing charges, and increased obsolescence.
- Research and development expense increased 10% in the quarter and 15% year to date, primarily for label-extension work, investigational studies, and red blood cell development.
- Selling, general and administrative expense increased 20% in the quarter and 30% year to date due mainly to U.S. commercialization activities.
- At June 30, 2015, cash and cash equivalents were $35.1 million, short-term investments were $75.9 million, and the investment in Aduro Biotech was $12.0 million. Total current assets were $144.5 million and working capital was approximately $122.2 million.
- Total debt was $19.9 million, including $2.5 million classified as current. Debt increased after the June 2015 drawdown of a $10.0 million Oxford Finance tranche. The debt matures in 2019 and bears interest at approximately 6.95% to 7.01% for amounts drawn.
- Stockholders’ equity was $110.5 million, compared with $41.5 million at December 31, 2014, primarily reflecting the January 2015 equity offering and the unrealized gain on Aduro shares.
Material Changes Versus the Prior Comparable Period
- January 2015 public offering of 14.6 million shares generated approximately $75.3 million of net proceeds.
- Operating losses and cash burn increased substantially despite relatively stable revenue.
- Gross margin declined sharply because of currency-related inventory costs, increased obsolescence, and manufacturing charges.
- The warrant liability declined from $10.5 million at December 31, 2014 to $4.0 million at June 30, 2015. Warrant revaluation produced a $2.7 million non-cash loss in the quarter and a $3.6 million non-cash gain for the six-month period.
- Aduro’s April 2015 IPO converted Cerus’s preferred shares into 396,700 common shares and resulted in a $12.0 million available-for-sale investment, with unrealized changes recorded in other comprehensive income.
- During the six months, Cerus issued 1.4 million shares from warrant exercises and had approximately 2.0 million 2010 warrants remaining outstanding at June 30.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected product revenue to increase as INTERCEPT gains acceptance, including potential U.S. contributions, but stated that meaningful U.S. sales were not expected in 2015.
- Management expected research and development and selling, general and administrative spending to continue increasing as the company supports the U.S. launch, IDE studies, post-approval requirements, label expansions, and red blood cell development.
- Management stated that available cash, cash equivalents, short-term investments, and product-sale proceeds were expected to fund requirements for at least the next twelve months, while acknowledging that the estimate depends on assumptions that may be incorrect.
- A third $10.0 million Oxford Finance tranche was available through December 31, 2015 only if Cerus achieved a specified trailing six-month revenue threshold. Failure to achieve the threshold could reduce liquidity.
- Cerus continued to incur substantial losses and stated that it may never achieve profitability or positive operating cash flow. Additional equity or debt financing may be required and could dilute shareholders or impose restrictive covenants.
- The company relies heavily on third-party manufacturers, particularly Fresenius, and has minimum purchase commitments of $6.9 million. Supply interruptions, supplier noncompliance, component shortages, or product obsolescence could impair sales and margins.
- Material weaknesses remained in internal controls over inventory valuation and cost of product revenue, and the timeliness and accuracy of accrued-liability adjustments. Management concluded that disclosure controls and procedures were not effective as of June 30, 2015.
- The platelet system required a post-approval clinical study. Ongoing Ebola and chikungunya/dengue IDE studies and the European Phase III chronic-anemia trial could require additional funding and may be delayed or unsuccessful.
- Total contractual obligations were $34.2 million, including $24.6 million of debt obligations, $6.9 million of minimum purchase commitments, $2.0 million of operating leases, and $0.7 million of other commitments.
- Key operating risks include uncertain U.S. market adoption, reimbursement and licensing requirements, foreign-exchange volatility, concentrated customers and distributors, competition, regulatory changes, product liability, intellectual-property disputes, and continued dependence on capital markets.
Most Important Facts for Investors to Verify
- Whether U.S. customer adoption of the platelet and plasma systems produces meaningful revenue after 2015.
- Whether gross margins recover as manufacturing volumes increase and currency and inventory effects normalize.
- The rate of cash burn relative to the approximately $111 million of cash, short-term investments, and Aduro investment at June 30, 2015.
- Whether Cerus satisfies the revenue threshold required to draw the final $10.0 million Oxford Finance tranche.
- Progress in remediating the reported material weaknesses in internal control over financial reporting.
- Results and timing of the required platelet post-approval study, IDE studies, and red blood cell clinical and regulatory programs.
- Fresenius’s continuing ability to manufacture and supply INTERCEPT products and Cerus’s exposure to minimum purchase commitments.
- Potential shareholder dilution from the remaining at-the-market facility, outstanding warrants, stock options, and future financing needs.