Cerus Corporation — Q3 2013 Form 10-Q Summary
Business context and reporting period
Cerus Corporation develops and commercializes the INTERCEPT Blood System for pathogen reduction in blood components. Platelet and plasma systems were marketed internationally, primarily in Europe, the Commonwealth of Independent States, and the Middle East; the red blood cell system remained in clinical development. The filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Product revenue | $10.5 million | $8.3 million | $30.4 million | $26.2 million |
| Total revenue | $10.5 million | $8.3 million | $30.4 million | $26.3 million |
| Gross profit on product revenue | $3.7 million | $3.8 million | $12.8 million | $10.7 million |
| Product gross margin | 35% | 47% | 42% | 41% |
| Loss from operations | $(8.4) million | $(4.3) million | $(20.5) million | $(13.7) million |
| Net loss | $(20.5) million | $(3.5) million | $(37.5) million | $(14.2) million |
| Net loss per share | $(0.29) | $(0.06) | $(0.56) | $(0.26) |
Research and development expense was $4.4 million in Q3 and $10.6 million for the nine months, up 129% and 94%, respectively, primarily from red blood cell clinical development and FDA modular PMA activities. Selling, general and administrative expense increased 24% in Q3 and 19% year to date.
The nine-month operating cash outflow was $20.1 million, compared with $11.0 million in 2012. Investing cash outflow was $29.6 million, principally reflecting purchases of short-term investments. Financing activities provided approximately $47.4 million, including $38.0 million of net proceeds from the March public offering and $13.0 million from the Cantor at-the-market facility. Cash and cash equivalents were $24.4 million at September 30, 2013, and investments were $29.0 million.
Total assets were $79.4 million and working capital was $31.9 million at September 30, 2013. Debt consisted of $3.6 million outstanding under the Comerica revolving line of credit, all classified as current and due in 2014. The $5.0 million growth capital loan was repaid in April 2013. The company was in compliance with its debt covenants at quarter-end.
Material changes versus the prior comparable period
- Product revenue increased 28% in Q3 and 16% for the first nine months, driven mainly by higher plasma kit and illuminator volumes, existing-customer growth, and new customer adoption.
- Q3 product gross margin declined to 35% from 47%, primarily because of product mix; the nine-month margin improved modestly to 42% from 41% because of favorable manufacturing variance and lower scrap charges.
- Operating losses widened as development and corporate spending increased.
- The warrant liability increased from $5.9 million at December 31, 2012, to $22.7 million at September 30, 2013. The resulting non-cash revaluation charge was $12.4 million in Q3 and $16.8 million for the nine months, versus a small gain in the 2012 periods.
- Accounts receivable increased to $7.0 million from $4.4 million, and inventory increased to $12.7 million from $10.2 million.
- The company raised substantial equity capital, increasing common shares outstanding to approximately 70.5 million as of October 28, 2013.
Guidance, outlook, risks, contingencies, and unusual items
Management expected platelet and plasma revenue to continue increasing as market acceptance expanded, but stated that historical growth may not predict future results. No formal quantitative revenue or earnings guidance was provided. Management expected research and development spending to rise as European red blood cell Phase III trials and FDA modular PMA submissions progressed, and expected SG&A to increase with potential U.S. commercialization and geographic expansion.
- The FDA approved proposed modular PMA shells for the plasma and platelet systems. Cerus submitted the first platelet module in September 2013 and expected additional modules in December 2013 and March 2014. Approval remained uncertain and could require additional clinical or post-marketing studies.
- The red blood cell program required further clinical, in vitro, manufacturing, and regulatory work and additional funding. Management did not expect approval for several years, if ever.
- Management believed product sales, cash balances, and available debt would fund requirements for at least the next twelve months, but acknowledged a continuing need for external capital and the risk of curtailing development or commercialization if financing was unavailable.
- The company remained dependent on Fresenius and other sole-source suppliers. The Fresenius manufacturing and supply agreement was scheduled to expire December 31, 2013, subject to automatic renewal provisions. Supply interruptions, manufacturing defects, minimum purchase commitments, inventory expiration, and unfavorable cost changes could affect revenue and margins.
- Three customers represented approximately 55% of outstanding trade receivables at September 30, 2013. Product revenue was also concentrated among several large international customers.
- The warrant liability is a Level 3 fair-value estimate sensitive to Cerus’s stock price, volatility, interest rates, and change-of-control assumptions; related gains and losses may create significant earnings volatility without corresponding cash flows.
- Other risks included continued losses, regulatory delays, limited market adoption and reimbursement, competition, product liability, foreign exchange exposure, intellectual-property challenges, covenant compliance, potential equity dilution, and earthquake-related business interruption.
Important facts for investors to verify
- Progress, timing, and FDA feedback on the modular PMA submissions for the platelet and plasma systems.
- Funding needs and clinical results for the red blood cell system, including the European Phase III trials.
- Renewal and commercial terms of the Fresenius manufacturing and supply agreement and the status of other sole-source suppliers.
- Cash burn, investment balances, availability under the Comerica revolving facility, and the June 2014 debt repayment obligation.
- Future warrant-liability revaluations and their potential effect on reported net loss and stockholders’ equity.
- Revenue concentration, customer adoption, reimbursement conditions, product mix, and sustainability of the reported gross margins.
- Potential dilution from the Cantor equity facility, outstanding options, warrants, and other equity awards.