Cerus Corporation 2016 Q2 Form 10-Q Summary
Business context and reporting period
Cerus Corporation is a blood-safety company focused on the INTERCEPT Blood System for pathogen reduction of platelets, plasma, and red blood cells. The platelet and plasma systems were commercially approved in the United States in December 2014; the red blood cell system remained in development. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $9.3 million | $8.8 million | $16.9 million | $16.5 million |
| Gross profit | $4.3 million | $1.8 million | $7.6 million | $4.8 million |
| Gross margin | 46.2% | 20.4% | 45.3% | 28.9% |
| Operating loss | $(16.7) million | $(15.5) million | $(32.1) million | $(29.9) million |
| Net loss | $(18.2) million | $(16.0) million | $(35.0) million | $(25.4) million |
| Basic loss per share | $(0.18) | $(0.17) | $(0.35) | $(0.27) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(27.6) million | $(30.5) million |
Research and development expense increased 64% in the quarter and 43% year to date, primarily because of red blood cell clinical development and regulatory work for the platelet and plasma systems. Selling, general and administrative expense increased 3% in the quarter and 2% year to date.
At June 30, 2016, cash and cash equivalents were $7.7 million, short-term investments were $76.4 million, and marketable equity securities were $4.5 million, including the Aduro investment. Total current assets were $112.2 million and working capital was approximately $86.5 million. Total debt was $19.9 million, consisting of $6.1 million current debt and $13.7 million non-current debt. Stockholders’ equity was $74.6 million, and accumulated deficit was $632.8 million.
Material changes versus the prior comparable period
- Revenue increased 5% in the second quarter and 2% for the first six months, supported by higher European platelet-kit utilization and favorable foreign exchange effects.
- Cost of revenue declined 29% in the quarter and 21% year to date. Gross margin improved primarily because Fresenius royalties were eliminated after June 30, 2015, and because of favorable foreign exchange and product mix.
- Despite improved gross profit, operating and net losses widened because of substantially higher R&D spending and higher interest expense.
- Cash and cash equivalents fell from $71.0 million at December 31, 2015 to $7.7 million at June 30, 2016. The company shifted significant funds into short-term investments; total cash, short-term investments, and marketable equity securities were approximately $88.5 million at quarter-end.
- Net cash used in investing activities was $51.1 million, primarily reflecting purchases of investments. Financing provided $15.4 million, including $14.5 million of net proceeds from the sale of 2.4 million shares under the Cantor at-the-market program.
- The company did not achieve the required trailing six-month revenue threshold by June 30, 2016, so the additional $10.0 million Term Loan C was no longer available.
Guidance, outlook, commentary, risks, and unusual items
- Management expected INTERCEPT product revenue to increase as U.S. and other markets adopt the technology, but noted exposure to the euro, Russia/CIS economic conditions, customer adoption, reimbursement, and pricing.
- The company expected to begin recognizing revenue under its BARDA agreement in the third quarter of 2016. The agreement provides up to $30.8 million in base-period funding and a potential total opportunity of $180.5 million over five years, but option-period funding is discretionary and BARDA may terminate for convenience. The company did not recognize BARDA revenue in the first half of 2016.
- The red blood cell system remained subject to clinical, regulatory, manufacturing, and funding risks. A potential CE-mark submission was planned for the second half of 2016, but the filing stated that regulatory approval was not expected within the next twelve months, if ever.
- On July 28, 2016, after quarter-end, the Oxford loan agreement was amended to extend the interest-only period through January 2017, followed by 29 months of principal and interest payments. The loans mature June 1, 2019 and bear interest rates of 6.95% and 7.01%.
- The company had approximately $43.1 million of contractual obligations, including debt, minimum purchase commitments, Fresenius manufacturing and development obligations, leases, and other commitments.
- The company relies heavily on Fresenius and other sole or limited-source suppliers. Supply interruptions, manufacturing nonconformities, inventory obsolescence, or required regulatory approval of alternative components could materially affect revenue and margins.
- The company continued to expect operating losses and negative cash flow while it commercializes its products and funds clinical and regulatory programs. Management stated that available liquidity, product revenue, and expected BARDA receipts should fund requirements for at least the next twelve months, subject to material assumptions and risks.
- Other notable exposures include regulatory approval and post-approval study requirements, reimbursement uncertainty, product liability, intellectual property disputes, foreign exchange volatility, Brexit-related uncertainty, dependence on distributors and concentrated customers, and the possibility of additional equity financing and dilution.
- No legal proceedings, off-balance-sheet arrangements, or material changes in disclosure controls were reported. Management concluded that disclosure controls and procedures were effective as of June 30, 2016.
Most important facts for investors to verify
- Whether U.S. adoption of the platelet and plasma systems produces sustained revenue growth and improved operating leverage.
- The pace and cost of the red blood cell clinical and regulatory program, including the status of the chronic-anemia trial and potential CE-mark submission.
- Actual BARDA reimbursements, exercise of option periods, required company co-investment, and any changes to the contract.
- Liquidity consumption, investment maturities, debt repayment requirements, and the timing or need for additional equity or debt financing.
- Gross-margin sustainability after the benefit from eliminating Fresenius royalties and favorable foreign exchange effects.
- Fresenius and other supplier capacity, minimum purchase obligations, inventory aging, and potential component or illuminator approval issues.
- Regulatory, reimbursement, intellectual property, product-liability, and post-approval study developments that could limit commercialization or require additional capital.