Adoption of Cerus' Technology Makes Its Valuation Look Ridiculous

| About: Cerus Corporation (CERS)

Shorting is a state of mind - and I know someday there will be a crisis with the blood supply in the US, or in a developed nation, that rivals the problems of the 1980s and HIV contamination. How do you play this? Cerus (NASDAQ:CERS).

Cerus makes something called the INTERCEPT System, a blood pathogen inactivation system that enables blood banks to essentially accept blood from anyone. Blood pathogen inactivation is the formal term for blood cleaning - cleaning of any pathogens, such as West Nile, H1N1, HIV and so on, that could be transmitted from donor to recipient. At present, the INTERCEPT System works only to produce blood platelets and is approved in many nations in Europe, with Germany being the latest, where Cerus is rolling out the product. In the US the company is negotiating with the FDA for a Phase III trial to obtain approval here.

Platelets are a big market but small beer compared to the $3.5 billion whole blood market, and Monday Cerus announced its US, Phase I trial of the INTERCEPT System to treat whole blood was a success, hitting its primary endpoint, a critical first step for approval for the product. Most analysts did not think INTERCEPT would work when treating whole blood.

To quote the company press release,

"The randomized, single-blind, controlled, multi-center Phase 1 clinical trial of the INTERCEPT red blood cell system included 27 healthy subjects at two clinical trial centers. Each subject received two transfusions of the subject's own red blood cells, one INTERCEPT-treated, and the other a control not treated for pathogen inactivation. The primary endpoint of the clinical trial, a mean INTERCEPT red blood cell recovery of greater than 75 percent at 24 hours post-transfusion, was met. The INTERCEPT red blood cells had a recovery of 88% compared to 90% for control red blood cells, and both INTERCEPT-treated and control red blood cells met the criteria for red blood cell recovery recommended by the U.S. Food and Drug Administration. The half-life of the red blood cells was also evaluated, and INTERCEPT-treated red cells were within the established reference range of 28 to 35 days. The half-life of INTERCEPT red blood cells was 33 days compared to 40 days for control red blood cells according to the preliminary analysis. The investigators plan to submit data from the study for presentation at an upcoming scientific congress."

At the same time the company announced a partnerhsip with France's blood transfusion agency, the Etablissement Francais du Sang (EFS). The two entities will jointly develop, with considerable cost sharing, INTERCEPT for whole red blood cells.

Cerus is light years ahead of potential competitors in platelets and whole blood, competitors who may also become potential acquirers. I can only assume the stock opened strong (I am writing this before the open), but this microcap, if it is able to follow the Phase I trial with successful follow up trials that lead to an approval, is grossly undervalued at $2 a share. Even without whole blood, current sales forecasts and the adoption of the technology to treat blood platelets make the $2 valuation ridiculous. I have followed the company and written about it in my service, and like the way management has managed the company's progress, country by country, trial by trial. Take a look.

Disclosure: I am quite long Cerus.