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Cerus (NASDAQ:CERS)

Q3 2013 Earnings Call

October 29, 2013 4:15 pm ET

Executives

Lainie Corten - Senior Director of Global Marketing & Investor Relations

Kevin D. Green - Chief Financial Officer and Vice President of Finance

Carol M. Moore - Senior Vice President of Regulatory Affairs, Quality and Clinical

William M. Greenman - Chief Executive Officer, President and Director

Analysts

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Christopher Hamblett - Cowen and Company, LLC, Research Division

Blake C. Arnold - Robert W. Baird & Co. Incorporated, Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

William Hyman

Operator

Good day, ladies and gentlemen, and welcome to the Cerus Corporation Third Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your hosts for today's conference, Lainie Corten, Investor Relations for Cerus. Ms. Corten, please go ahead.

Lainie Corten

Thank you, operator, and good afternoon. I'd like to thank everyone for joining us today. With me on the call are Obi Greenman, Cerus' President and Chief Executive Officer; Kevin Green, our Chief Financial Officer; and Carol Moore, our Senior Vice President of Regulatory Affairs, Quality and Clinical.

Cerus issued a press release today announcing our financial results for the third quarter ended September 30, 2013, and describing the company's recent business highlights. You can access a copy of this announcement on the company website at cerus.com.

I would like to remind you that during this call, we will be making forward-looking statements regarding the company's products, prospects and results, including expectations for future sales growth in 2013 revenues; the anticipated timings, completion and success of the company's modular PMA submissions to FDA; the potential U.S. commercial launch of the INTERCEPT Blood System for plasma and platelets, including anticipated marketing expenses and activities in support thereof; future operating expenses and cash utilization; research and development activities and expenses related thereto; and the timing of completing our ongoing clinical trials, including the reporting of data from these trials.

The company's actual results may differ materially from those suggested by forward-looking statements the company will be making, and the company assumes no obligation to update guidance or other forward-looking statements.

I call your attention to the disclosure in the company's SEC filings, in particular, Cerus' quarterly report for the fiscal period ended June 30, 2013, on Form 10-Q, including the section entitled Risk Factors. This call will be archived temporarily on our website and will not be updated during that time.

On today's call, we'll start with a quarterly financial results from Kevin, followed by Carol, who will give an update on our development programs and regulatory submissions. We'll conclude our prepared remarks with commentary from Obi, who will review the recent quarter's achievements.

And now, it is my pleasure to introduce Kevin Green, Cerus' Chief Financial Officer.

Kevin D. Green

Thank you, Lainie. Earlier today, we reported revenues of $10.5 million for the quarter, up sequentially from $10.2 million last quarter and representing a 28% increase from Q3 of last year. Revenue growth was driven by increased deployment of Illuminators in several geographies, as well as elevated sales of plasma disposal kits.

Based on our 9-month revenue of $30.4 million, we are reiterating our full year product revenue guidance of $41 million to $43 million. Our gross margins on product sales during the third quarter were 35%, following the 43% we reported last quarter and compared to 47% reported in the same period last year.

Gross margins during the third quarter of 2013 were negatively impacted by certain period costs and the mix of products sold relative to the prior year. Gross margins were 42% for the 9 months end of 2013, compared to 41% for the same period in 2012. Looking ahead, we continue to expect that our annualized margins will remain in the mid-40s at current production levels and will improve as production ramps to meet the anticipated growth and demand.

Taking a look at operating expenses. We reported $12.1 million for Q3, compared to $8.2 million during the same period in 2012 and $11.5 million sequentially from last quarter. Operating expenses for the first 9 months were $33.3 million compared to $24.5 million during the same period last year.

As mentioned last quarter, this increase is consistent with our expectation for rising research and development expenditures in support of the ongoing platelet and plasma PMA filings, as well as the conduct of our European Phase III red cell trials. We are now starting to build out our commercial infrastructure in the U.S., which we believe will also contribute to increased operating expenses, as we approach the potential U.S. product launches.

Net loss realized in Q3 was $20.5 million or $0.29 per share compared to $3.5 million or $0.08 per diluted share realized in Q3 of last year. For the first 9 months, net losses were $37.5 million compared to $14.2 million in 2012. Current quarter net losses were impacted by noncash charges of $12.4 million from the mark-to-market adjustment associated with the revaluation of our outstanding warrants. For the first 9 months, net losses were affected by $16.8 million in noncash charges from the warrant reevaluation.

Now looking at the balance sheet. We ended Q3 with cash and short-term investments of $53.3 million compared to $26.7 million at the end of 2012 and $58.2 million at the end of the second quarter.

With that, I'd like to turn the call over to Carol, who will discuss our development programs and regulatory process.

Carol M. Moore

Thank you, Kevin. I'll start with an update on our red blood cell clinical program, then transition to the status of our U.S. regulatory submissions for platelets and plasma. As we've discussed previously, Cerus currently has 3 studies of INTERCEPT red cells, including a Phase II study in the U.S. and 2 Phase III studies in Europe. I'd like to briefly remind you of the design of each study and provide an update on the projected completion of each trial.

Our U.S. Phase II red cell study is a 28-subject crossover study evaluating the recovery and survival of INTERCEPT-treated red cells compared to untreated cells. On our last call in July, we indicated that a routine clinical audit had revealed problems with the precision of one assay required for calculation of red cell recovery and survival at one of the 2 sites and that we plan to collect data from an additional 12 subjects at the impacted site. We now have taken corrective actions to improve the assay precision, have reinitiated enrollment and expect the last patient out in Q2. We now expect to report data from the Phase II trial as early as Q3 2014.

Our first Phase III trial evaluates INTERCEPT red cells for treatment of acute anemia in cardiovascular surgery patients undergoing elective procedures. This is a blinded study, with patients randomized to receive 7 days of transfusion support beginning on the day of surgery with either conventional or INTERCEPT red cells. Target enrollment is 50 patients and the primary endpoint is hemoglobin content per red cell unit transfused.

We've previously estimated that the acute trial would take approximately 12 months to complete. Although it's our policy not to disclose the number of patients enrolled, I can tell you that based on the enrollment rate we've seen to date, we now expect the last patient out in approximately Q3 2014, with data reported several months later.

The second Phase III trial is a 70-patient study being conducted for the indication of chronic anemia in transfusion-dependent thalassemia major patients. This trial, which is also blinded, has a crossover design in which each patient receives both INTERCEPT and conventional red cell transfusions over approximately 12 months on study. The primary efficacy endpoint is hemoglobin usage per body weight, and the primary safety endpoint is the immune response to repeated exposure to INTERCEPT red cells.

Our previous estimate of the time required to complete the chronic Phase III study was approximately 2 years, based on expected enrollment rates prior to initiating the study and the duration of time on study for each enrolled patient. We are now revising this estimate due to unforeseen circumstances, which have impacted the conduct of the study and observed rate of enrollment.

Our original lead investigator unexpectedly passed away earlier this year, requiring us to appoint a new lead investigator from the secondary clinical site, which had not planned to begin trial activity so quickly. We now estimate the chronic study will take at least 3 years to complete and are actively investigating not only measures to accelerate enrollment in Italy, but also the possibility of additional trial sites, including sites in other countries. We will provide further information as we continue to enroll in Italy and clarify our plans for additional study sites.

Turning now to our PMA submissions in the U.S. We have remained on schedule with the timelines agreed with the FDA. In August, we submitted the third of 4 planned modules for INTERCEPT plasma and plan to submit the final module in November. For INTERCEPT platelets, we submitted our first PMA module in September and plan to submit the remaining modules in December and March.

These schedules could result in FDA responses regarding approval of both products in late 2014. While review timelines are variable, this represents our best estimate at this time. We will provide ongoing updates each quarter as we make progress and continue our dialogue with the FDA.

And now, I'd like to turn the call over to Obi.

William M. Greenman

Thank you, Carol. The continued progress for completion of the PMA submissions and the possibility of future U.S. approval decisions in the second half of 2013 for both products was definitely noted at the American Association of Blood Banks conference we attended earlier this month in Denver. In parallel with the regulatory applications, we are continuing to build the commercial infrastructure necessary for launch, leveraging the strong and experienced team that we have had selling INTERCEPT in Europe over the last 7 years.

After 2 decades of developing INTERCEPT and proving its operational benefits in Europe and around the globe, the addition of new sales deployment, regulatory and operations staff for the North American launch is bringing palpable excitement to the company.

In the context of the PMA submissions, we have deployed our system and have begun or about to initiate in vitro studies for both INTERCEPT platelets and plasma at 5 blood centers in the United States. For the Cerus team based in California and in Europe, this is a seminal moment, having U.S. blood centers processing blood components with INTERCEPT.

The track record that we have established in Europe, particularly in Switzerland, as a reliable supplier with a robust technology, seems to resonate with other blood centers and regulatory authorities. We believe the recent 2012 haemovigilance data coming out of Switzerland and France further solidifies our leadership position in the field of pathogen inactivation. We continue to perform in Europe, and I congratulate the sales team on delivering another solid quarter in what has historically been a slow period due to the summer holiday season in Europe.

As we look forward to 2014, we see a very exciting year ahead, including the roll out of INTERCEPT in many new centers, 2 potentially U.S. approvals and Phase II and III red cell clinical data. We look forward to providing further updates on these topics in February on our next call.

Operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeremy Feffer from Cantor Fitzgerald.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

First, Kevin, I just wanted to be clear on the gross margin issue. I think you mentioned that it was more product mix related to, I guess, the year-over-year comparison. Can you provide a little more color? Was that -- did it have to do with maybe Illuminator versus kit mix, or was it a geographic issue?

Kevin D. Green

Well, it has more to do with the type of disposable kits. So we had a higher proportion of plasma kits sold in the current period than we have had historically, and those have a higher carrying cost for us so that our margins are compressed.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

But going forward, you feel good that the mix will normalize to get you back into the mid-40s?

Kevin D. Green

We do, Jeremy. This last quarter, we had a pretty high preponderance of kits -- plasma kits sold in France as a result of their solvent detergent facility going down for maintenance.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Got it, okay. And then in last quarter, you started talking about some of the U.S. pre-launch activities. I think you cited some early marketing and some market research. Just curious how that's going and if you have any early thoughts. I know you have to be very careful how you talk about the U.S. But how are you thinking about either building the sales force or either working directly with the blood centers? How are you thinking about that launch at this point?

William M. Greenman

Thanks, Jeremy. This is Obi. Yes, so things are going well. As I've mentioned on the script, we basically have the system deployed at 5 sites, and they're big blood centers throughout the United States, so that's obviously good from just sort of an experience basis and this is for in vitro studies in support of the PMA. But I think it just leads to sort of a broader awareness. I think the other thing that we saw at the most recent AABB meeting was that the topic of pathogen inactivation came up very frequently, and it also was raised during a number of scientific sessions around transfusion-transmitted disease or even the operational benefits that might be realized by pathogen inactivation. So I think all in all, we're very positive on the reception that our technology is likely to get should there be an approval decision in the second half of next year. And then with regard to your question related to our commercial buildouts, we've added a number of people already and soon, we'll be hopefully making some announcements around some higher-level hires as it relates to our sales organization.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Okay. And then one last one for me before I jump back in queue. So kind of a follow-up to something I've asked you before, and I'm curious to sort of see how things have progressed. You mentioned a couple of quarters ago that you were starting to see some impact in international markets from the FDA sort of enabling the beginning of these PMA processes. I'm wondering if you're seeing any further follow-through, if you're getting more acceptance in some o U.S. markets as a result of the FDA's kind of approval of this, or tacit approval.

William M. Greenman

Yes, so obviously, it's still under review. But I think just the fact that it's been accepted for PMA submission has resonated with a number of large blood services around the globe and also the regulatory authorities who review INTERCEPT. And so I think that the real weight will be seen should we get an approval decision. However, in the interim, I'd say that, at least, it's really seen as being a more sort of validated technology amongst the international blood banking community. And I think that's, to a larger extent, been driven by the fact that the FDA is no longer sort of waiting for additional information that they've actually said, "Go ahead and submit." And obviously, we're also generating a lot of data out of the haemovigilance programs that exist in Europe, specifically in Switzerland and France, and that data continues to support the product as well.

Operator

And our next question comes from the line of Chris Hamblett from Cowen and Company.

Christopher Hamblett - Cowen and Company, LLC, Research Division

Just -- could you provide an update on where the U.K. is in terms of validating the PI platelets and how that process is likely to play out, and if the prospects of U.K. approval, adoption or commercialization has improved at all, or is the timelines with regard to platelets has accelerated?

William M. Greenman

Yes, so just to update everyone. There's been a recent posting on the website of the U.K.'s NHSBT, which is the National Health Service Blood and Transplant group that basically provides national blood service in the U.K., about their conduct of the validation study for INTERCEPT platelets, they'll basically be looking at both processing and transfusion of about 1,500 units. This is all part of a process that they would go through should they decide to implement pathogen inactivation in the U.K. And the next step is a median by SaBTO, which is their blood safety and availability policy group, sort of a external committee to the NHSBT, in which, in December, they'll be the reviewing the topic of pathogen inactivation. And then should there be a recommendation, then that would go on to a tender process in 2014. And I don't think we have any visibility on any of the timing of that. And then ultimately, if a tender were awarded to Cerus then, it's likely that you could see implementation in 2015. So I think it's a little premature to say what the likelihood of success of those activities of that process is, but at the same time, it's promising.

Christopher Hamblett - Cowen and Company, LLC, Research Division

Okay. And then, O, with regard to chronic trial, is there any way you can give us an idea when data may read out now with that delay?

William M. Greenman

I'll turn that over to Carol. Basically, what we said on the call was that we were taking about 1 year delay in the conduct of that study. Obviously, we're going to be making significant efforts to try to improve enrollment in Italy and are looking at expanding to additional sites outside of Italy. But perhaps, Carol can comment further.

Carol M. Moore

I think you have captured it, Obi. We think that it will take about 3 years to conduct the trial at this point. So that's the operating parameters right now.

Operator

[Operator Instructions] Our next question comes from the line of Blake Arnold from Robert W. Baird.

Blake C. Arnold - Robert W. Baird & Co. Incorporated, Research Division

So first, I was wondering if you could comment on any seasonal patterns that you've observed in the business that could impact Q4. Last year, we saw a pretty large sequential increase in the fourth quarter due to revenue recognition timing. And so I was wondering, with your guidance maintained, obviously, the high end would infer a little higher level of quarterly revenue than we've seen throughout the year so far. So is there anything we should be considering from a modeling standpoint as we look out into Q4 in terms of any accounting items or timing for any large orders?

Kevin D. Green

So this is -- and this is Kevin. Thank you for the question. As we mentioned, we provide annual guidance. And I think looking where we ended Q3 and ahead, first, you should not expect any accounting adjustments or anything of that nature. And in looking at the full year, we're comfortable with $41 million to $43 million.

Blake C. Arnold - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just a very quick follow-up on the U.K. First, will there be any near-term revenue impact from that pilot, that validation program? And then also, how far along is the MHS in evaluating PI for plasma? Any color on timelines there would be great.

William M. Greenman

Yes, it's 1,500 units, so it's not a lot of -- it won't be material as far as revenue from the NHSBT. With regard to plasma, they basically have -- they do mostly, I believe, quarantine. They do import for pediatric patients, plasma from Austria, roughly around 20,000 to 25,000 units annually. That product is now treated with methylene blue in the U.K. And in addition to that, there's a relatively significant amount of Octaplas or solvent detergent treated plasma that's used in the U.K. So I think the focus for the near term for SaBTO and the NHSBT around any sort of changes to their policies around pathogen inactivation is primarily around platelets. And I think that just corresponds to the overall global concern about transfusion-transmitted sepsis in platelet units and sort of the increasing awareness of that issue as a function of the sort of 5 years of experience that the American Red Cross has had in doing bacterial culture.

Operator

And our next question comes from the line of Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Kevin, can you break out the Illuminators sales in the quarter?

Kevin D. Green

Sure. So they were roughly 5% of our overall revenue. The remaining 93% was disposable kits with some service revenue that just kind of rounds it out.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Great. And then you also mentioned the uptick in the French plasma orders. Can you just provide a little bit more color there on that phenomenon? How much in incremental sales did that represent?

William M. Greenman

Well, I think, last time, we said we're in the sort of 30% range and -- for the quarter, as far as market share in France. And so this quarter, it was more like 40% as a function of the seasonal shutdown of the SD facility in Bordeaux. So I think from everything we see, I guess, on the upside is that INTERCEPT plasma is performing very well on routine, and it's now currently deployed at roughly 13 sites within France. At the same time, there has been no change in their perspective as it relates to sort of balancing the mix between quarantine SD plasma and INTERCEPT. And so I think just going into 2014, what we'd hope to do is continue to perform well in routine use, which is something that is happening. And then ultimately, the economics and ease of use of maintaining their inventory will gradually shift INTERCEPT to a larger market share. But right now, it's still -- the guidance is around 30% -- 1/3, 1/3, 1/3.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Got it. So that 40% should step down starting when, the first quarter or sometime in the fourth quarter?

William M. Greenman

Yes, in the quarter -- for this quarter, yes.

Zarak Khurshid - Wedbush Securities Inc., Research Division

This quarter. Okay.

William M. Greenman

So it's basically, once they have [indiscernible] availability picks up, then a little bit more of the French demand for plasma goes back in the SD.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Got it. And so I guess, if you back out that French number, that extra French -- those plasma orders, I mean, France seemed a little bit weak last quarter as I recall. Can you just -- maybe just talk about kind of the seasonality there, the lumpiness of that business in general?

William M. Greenman

I think that the issue that have there, if it is an issue, is just that we're still at roughly 10% of the platelet supply in France. They are conducting a larger evaluation of INTERCEPT platelets at 6 sites. So we'll see some increase in sales as a function of that evaluation, but not anything that's that material to the overall French business, I would say. And then as it relates to plasma, I think the -- that you could see like a $0.5 million impact between -- well, you saw $0.5 million impact between Q2 and Q3 roughly. And so going into Q4, maybe a little bit less than that as just far as the downtick.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Got it, that's helpful. And then kind of as a last follow-up and I'll jump back into the queue, with the delays in the European studies, I mean, can you quantify the costs or the financial impact of all this? And what are you learning from the European experience, and how are you kind of applying that or learning from that as you kind of progress towards a U.S. product launch or additional U.S. studies?

William M. Greenman

Well what -- Carol will talk about specific details around patient enrollment, what we're learning from it because I think that some of this is a function of the -- the death of this guy who was a really a very significant thalassemia patient advocate, and an advocate for us as well. So that was sort of unforeseen. But I'll let Carol talk about that a little bit further. As far as cost, I think the cost will be sort of nominal because it's primarily -- the cost for the chronic study are mostly from a per patient -- on a per-patient basis. So there will be incremental costs as far as bringing on new sites, but nothing that would -- is that significant with regard to the overall study expenses. But maybe Carol, I mean, just the learnings from the European experience and how that might translate into U.S. endeavors.

Carol M. Moore

Well, I think that an important learning is, certainly, this is an orphan population, and they're very conservative with regard to enrollment. But I think we've learned that it's important to have an advocate. And unfortunately, we have to change advocates kind of midstream. But it's important to have an advocate. It's important to tie in effectively to this population, in our case, the thalassemic population. And we'll continue to learn about how best to do that and present ourselves at meetings where we can continue to represent the importance of this study and the opportunity for enrollment, and we'll apply those learnings when we -- as we progress in this trial, as well as think about the future.

Operator

And our next question comes from the line of Bill Hyman from HyBar.

William Hyman

So can you give any color on Cerus' activities in Asia, and in particular in China?

William M. Greenman

Yes. So maybe I'll actually turn it over to Carol as it relates to the SFDA approval process. But fundamentally, we've been sort of more focused on geographies outside of Asia. And what we're currently focused on, from a commercial perspective, is getting new distribution agreements in place, really on a country-by-country basis throughout Asia. And so going into 2014, we'll actually be having some headcount that's assigned to that region specifically as their sole responsibility. And we also believe that, that region will benefit strongly from a possible FDA approval. And so really, I wouldn't look to any meaningful sales coming out of Asia in 2014. But in the years beyond that, we should start to see some influence of the momentum that we see coming out of Europe and then in the possibility of an FDA approval. With regard to the China, Carol, why don't -- do you want to briefly cover where we are there?

Carol M. Moore

Well, I think the -- an important asset has been -- we've been able to recruit a very experienced regulatory person who is -- both speaks Chinese, as well as actually worked in China closely with the Chinese FDA. And she's been very helpful in putting us in contact with the right people and kind of reactivating our process in China. So I think we're actively pursuing the application, and we will make that a priority for 2014.

Operator

And at this time, I'm not showing any further questions. I would now like to turn the call back over to management for any closing remarks.

William M. Greenman

Well, thank you, all, for joining us today. Once again, we look forward to updating you again on our next call in late February. Thanks very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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