Cerus Corporation 2020 Q3 Form 10-Q Summary
Business context and reporting period
Cerus Corporation develops and commercializes the INTERCEPT Blood System for pathogen reduction of platelets and plasma and is developing a red blood cell system. The platelet and plasma systems are approved and marketed in the U.S. and selected international markets; the red blood cell system remains investigational. This report covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Product revenue | $23.6 million | $18.0 million | 31% |
| Government contract revenue | $5.6 million | $4.8 million | 16% |
| Total revenue | $29.2 million | $22.8 million | 28% |
| Gross profit on product revenue | $12.7 million | $10.4 million | 21% |
| Product gross margin | 54% | 58% | Down 4 points |
| Operating loss | $(14.0) million | $(17.0) million | Improved $3.0 million |
| Net loss | $(14.1) million | $(18.0) million | Improved $3.8 million |
| Net loss per share | $(0.08) | $(0.13) | Improved |
For the nine months ended September 30, 2020, product revenue was $63.7 million, government contract revenue was $16.9 million, total revenue was $80.7 million, operating loss was $44.0 million, and net loss was $45.5 million. Product gross margin was 55%, unchanged from the comparable 2019 period.
Operating expenses were $32.2 million in Q3 2020, essentially unchanged year over year. Research and development expense was $15.9 million, while selling, general and administrative expense was $16.3 million. Nine-month R&D expense increased 8% to $47.3 million, primarily due to red blood cell development, product enhancements and illuminator design work.
Cash flow, liquidity and debt
- Cash and cash equivalents were $29.0 million at September 30, 2020, compared with $35.0 million at December 31, 2019.
- Short-term investments increased to $106.2 million from $50.7 million. Including restricted cash, total cash, cash equivalents and investments were $137.6 million, compared with $88.2 million at year-end 2019.
- Net cash used in operating activities was $32.3 million for the first nine months of 2020, versus $57.3 million in 2019.
- Net cash used in investing activities was $57.2 million, primarily reflecting purchases of investments.
- Net cash provided by financing activities was $83.5 million, including $76.5 million of net proceeds from public offerings and equity incentives.
- Working capital increased to $131.1 million from $77.8 million at December 31, 2019.
- Total debt was $44.5 million, consisting of $40.0 million of term debt and $5.0 million drawn under a revolving facility, net of debt discount. The term loan carries an effective interest rate of approximately 7.5% and matures in 2024.
- The company was in compliance with its debt covenants at September 30, 2020. Debt is secured by substantially all company assets, subject to exclusions.
Material changes versus the prior comparable period
- Product revenue increased 31% in Q3 and 19% for the nine-month period, driven primarily by higher U.S. and European platelet kit volumes and increased plasma kit sales in Europe and the Middle East.
- Government contract revenue increased 16% in Q3 and 25% year to date, reflecting higher reimbursable costs under the BARDA agreement.
- Product gross margin declined in Q3 because of a non-routine write-off of components that failed quality specifications, partially offset by manufacturing scale benefits, volume discounts and foreign exchange effects.
- Operating loss and net loss improved despite continued losses, primarily due to increased revenue and lower net non-operating expense. Nine-month interest expense also benefited from the absence of the $2.1 million debt extinguishment loss recorded in 2019.
- January 2020 equity offerings generated approximately $76.5 million of net proceeds, including a $62.7 million underwritten offering and $13.9 million from the Cantor at-the-market program. The Cantor agreement was fully utilized and terminated after the reported sales.
- Stockholders’ equity increased to $109.2 million from $57.1 million at year-end 2019, while the accumulated deficit increased to $895.6 million.
Guidance, outlook, commentary and risks
- Management stated that available cash, cash equivalents, short-term investments, product receipts and government reimbursements are expected to fund capital requirements for at least the next 12 months, but this assessment depends on assumptions that may prove incorrect.
- The company expects continued operating losses and may never achieve profitability or positive operating cash flow. Future funding may be required through government contracts, equity or debt financing, or strategic arrangements.
- BARDA had committed up to $116.9 million as of September 30, 2020, with potential total funding of up to $213.9 million through December 31, 2021 if additional options are exercised. The company is responsible for approximately $5.0 million of co-investment and potentially an additional $9.6 million if certain options are exercised.
- BARDA may terminate the agreement for convenience, and future funding depends on milestones, government appropriations, audits and performance. The company had recognized $16.9 million of BARDA revenue during the first nine months of 2020.
- In September 2020, Cerus entered into a five-year FDA agreement with potential value of $11.1 million for next-generation whole-blood pathogen-reduction compounds; no work had begun under the agreement by quarter-end.
- COVID-19 delayed enrollment in the RedeS and ReCePI red blood cell studies, post-approval platelet studies and other development activities. Further delays could increase costs, reduce BARDA revenue and delay regulatory approvals.
- The company began resubmitting its red blood cell system for European CE Mark approval under the Medical Device Regulation in September 2020. Approval is not expected before 2022, if achieved at all. U.S. approval requires additional clinical and in vitro work.
- The company depends heavily on Fresenius and other sole or limited-source suppliers. Quality failures in certain components during September 2020 resulted in a significant inventory write-down and reduced Q3 product margin.
- Other material risks include customer adoption and reimbursement, concentrated customers, regulatory approval and post-approval obligations, manufacturing capacity, product quality or recall events, foreign exchange exposure, competition, intellectual property claims, debt covenant compliance and the need for additional capital.
Important facts for investors to verify
- Whether U.S. adoption of the INTERCEPT platelet and plasma systems accelerates before the March 31, 2021 FDA platelet-safety compliance deadline.
- The status, enrollment pace and safety results of the RedeS, ReCePI and post-approval studies, including the effect of COVID-19 disruptions.
- Whether BARDA exercises additional options, continues funding and reimburses costs as expected.
- The extent and recurrence of component quality failures, inventory write-offs and any resulting supply constraints or margin pressure.
- The timing and probability of European MDR approval for the red blood cell system and any additional data requirements.
- The company’s cash burn, access to capital markets, potential dilution and ability to meet debt and contractual commitments.
- Customer concentration and volume variability, particularly involving Établissement Français du Sang and the American Red Cross.
- Compliance with regulatory, manufacturing, debt covenant and government-contract requirements; management reported effective disclosure controls and no material legal proceedings as of the filing.