Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Cerus (NASDAQ:CERS)

Q1 2014 Earnings Call

May 01, 2014 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

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Zarak Khurshid - Wedbush Securities Inc., Research Division

Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division

Brett Reiss

Operator

Good day, ladies and gentlemen, and welcome to the Cerus Corporation First Quarter 2014 Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Lainie Corten, Investor Relations. 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; Carol Moore, our Senior Vice President of Regulatory Affairs, Quality and Clinical; and also Larry Corash, our Chief Medical Officer.

Cerus issued a press release today announcing our financial results for the first quarter ended March 31, 2014, 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 and performance, new customers and 2014 revenues; the anticipated impacts and timing of strategic business [indiscernible] Cerus' distributor relationship; the expected impact from the company's amended agreement with its manufacturer of disposable kits; the anticipated timing, completion and potential approval of the company's modular PMA submissions to FDA and medical device applications to Health Canada for plasma and platelets; the potential commercial launch of the INTERCEPT Blood System for plasma and platelets in North America and at the red blood cell system in Europe, including anticipated marketing activities and expenses in support thereof; future operating expenses in cash utilization; research and development activities and the expenses related thereto; the timing of completing our ongoing clinical trials, including the reporting of data from these trials; the success of our collaboration with Nipro; and the timing and outcome of an NHSBT position on INTERCEPT.

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' annual report for the fiscal period ended December 31, 2013, on Form 10-K, 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 begin with quarterly financial results from Kevin followed an update from Carol 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's my pleasure to introduce Kevin Green, Cerus' Chief Financial Officer

Kevin D. Green

Thank you, Lainie. Earlier today, we reported Q1 revenue of $7.9 million, consistent with our guidance that H1 revenues will be impacted as we work through a certain distributor transition. We expect this impact will continue through the second quarter. We remain confident in our full year 2014 revenue guidance of $38 million to $40 million.

Our gross margins during the first quarter were 47%, consistent with the margins we reported last quarter, as well as the 48% reported in the first quarter of 2013. I'd like to remind you that Q1 marks our first quarter of operating under our amended manufacturing agreement with Fresenius-Kabi, which establishes a fixed schedule of pricing for our kits over the next several years, with lower pricing for each successively higher tier of reduction. Accordingly, we believe our amended agreement provides a baseline for solid foundation for future expansion of margins.

Turning now to operating expenses. Total operating expenses for Q1 were $12.9 million compared to $12.1 million last quarter and $14.5 million during Q1 of last year. Looking ahead, we anticipate operating expenses to increase as we add resources commensurate with our global growth and as we transition from a distribution to direct model in some regions, consistent with the strategic changes we mentioned on the February call. In addition, costs may increase as we are able to develop and execute on a regulatory pathway, which would allow us to expedite the CE Mark approval and commercialization of the red blood cell program.

Net losses for the quarter were $0.2 million, or $0.12 per diluted share when adjusted for the dilutive impact of the mark-to-market value of outstanding warrants. Comparatively, net loss was $10.2 million, or $0.17 per diluted share, in Q1 of 2013.

The reported operating results for Q1 were impacted by a noncash gain of $9 million from the warrant accounting. Of the 5.9 million warrants currently outstanding, 2.4 million warrants expire in Q3 of this year, with the remainder expiring in November of 2015.

Now looking at the balance sheet. We ended Q1 with cash and short-term investments of $48.3 million compared to $57.7 million at the end of the last quarter. For 2014, as a whole, we expect our average quarterly burn to be approximately $7.5 million per quarter rather than matching the rate we recorded in Q1.

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

Carol M. Moore

Thank you, Kevin, I'll start with an update on the status of our regulatory submissions in the U.S. and Canada.

We are continuing our active dialogue with FDA as they progress in their review of our INTERCEPT plasma PMA. We are in the process of completing the required audit and responding to the questions we have received to date. We remain very optimistic that the plasma review will be completed in H2.

As recently announced, we've submitted our INTERCEPT plasma application to Health Canada, which has accepted the file for review. Though the Canadian medical device reviews operate under a 90-day review clock, we are estimating that a review response will likely take longer than this and guide you to expect approximately 6 months.

Turning now to INTERCEPT platelets. We still expect to submit our third and final module of the platelet PMA this quarter. We plan to submit our Canadian application for platelets in Q2 as well. Consistent with our previous estimates, we expect the Canadian review to take approximately 6 months and the U.S. review approximately 9 months.

I'd like to remind you that the timing I just mentioned for the plasma and the platelet review decisions represents our best estimate at this time. Review timelines are variable, and we will provide ongoing updates each quarter as we make progress and continue our dialogue with FDA and with Health Canada.

Moving on to our INTERCEPT red cell development program. I'll give a quick status update on our 3 ongoing clinical studies. In the U.S. Phase II red cell study, subjects are entering the second crossover period. We continue to anticipate reporting data in the second half of this year following the submission of the final report to FDA.

Turning to Europe. Enrollment in our European Phase III chronic trial continues to proceed at a slow pace and will likely require at least 3 years to complete at the present rate, consistent with our previous estimates. Finally, the European Phase III acute anemia trial continues to enroll at the expected pace, with results still anticipated in late 2014. We are continuing to evaluate options to accelerate both the completion of the chronic trial and our overall strategy and timeline for a potential European CE Mark approval.

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

William M. Greenman

Thank you, Carol. In addition to the continued red cell clinical progress, we also recently signed a collaboration agreement with Nipro, designed a simple delivery system to improve the operational ease of adding S-303 and glutathione to the red cell unit as part of the commercial INTERCEPT red cell kit.

We believe that Nipro can deliver an easy-to-use system that improves on the reconstitution set chip design we are using now for the initial CE Mark. We have already shown that the treatment process is robust and easy to implement at numerous blood centers throughout the globe. So delivering on this Phase III clinical data, as well as the volume and commercial kit design will make 2014 a pivotal year for the red cell program. We will even move this program toward CE Mark approval in Europe and, as Carol mentioned, are actively evaluating our commercial strategy to assess when we accelerate the CE Mark submission.

In our current INTERCEPT platelet and plasma markets, we continue to take actions in terms of distributor markets, which, as expected, is impacting our H1 revenues. As a reminder, we are transitioning into a direct model in some geographies and elsewhere, are hiring additional Cerus staff to support our distributors and improve their performance through training programs. We are currently working through the elements of this transition, with a goal of concluding these activities in the near term.

Earlier this week, the U.K. National Transfusion Safety Committee released its updated evaluation of pathogen inactivation technologies for platelets. The committee previously considered pathogen inactivation in 2010, concluding then that physician evidence was not yet available to fully characterize 3 available platelet systems. They had also questioned the cost effectiveness of PI in terms of cost per quality adjusted life year, or quality.

A new comprehensive evaluation was initiated in late 2013 in recognition that considerable additional data has since accumulated and that many global regulatory authorities and blood services are taking a serious look at bacterial contamination of platelets. We do not expect the committee to recommend a pathogen inactivation in this report and neither PI nor other blood safety measures meet the threshold typically set for cost effectiveness in the U.K. using the quality calculation. This was indeed the case, but we were pleasantly surprised to see INTERCEPT clearly identified as the only system with the potential to be "a safe and effective alternative to bacterial screening."

We believe this outcome does allow the U.K. blood services the option to replace bacterial detection when their current supply contract nears expiration. The NHSBT's operational evaluation of the INTERCEPT platelet system is ongoing, and it should provide a better framework for the operational economics and cost savings associated with the system.

We believe the INTERCEPT is well positioned to gain in this business if the NHSBT decides to implement pathogen inactivation in 2015.

Turning now to North America. We are very focused on the launch preparation as we enter the final stretch prior to our first potential U.S. and Canadian approvals. Our commercial team is largely built at the level we have targeted for the initial launch period, with just a few key positions to fill over the next several quarters. We are preparing launch materials and organizing key events related this year. When we receive the plasma approval decisions, our commercial team will be ready.

In conclusion, we are excited about the prospect of finally accessing the North American market and believe that the FDA process is moving forward on the schedule that we anticipated. We also look forward to reporting INTERCEPT red cell clinical data later this year. And finally, we remain confident that we've taken the decisive actions necessary to improve future sales performance and deliver ongoing revenue growth in the second half of 2014.

Operator, please open the call for questions.[Operator Instructions] Our first question will be coming from the line of Josh Jennings from Cowen and Company.

Question-and-Answer Session

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Just want to start off, I think we mismodeled in the consensus number out there for the quarter and then mismodeled the impact in the first half of the year. I know you're not looking to give quarterly guidance, but looking at the run rate in Q1 and then looking at the expected back half acceleration, in Q2, just directionally, are we looking at a kind of similar revenue run rate? How should the Street be thinking about the Q2 revenue projection?

Kevin D. Green

Josh, it's Kevin. So, you're right. We don't want to get into quarterly guidance just given where we are in our commercialization history, and there is going to be a quarterly choppiness. But looking specifically at this transition, we expect the first half to be fairly soft, with Q2 approximating Q1. And then in the back half of the year, we do expect our direct sales efforts to contribute meaningfully to the top line, as well as some of the other regions that we're continuing to explore coming online.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Okay, great. That's helpful. And then just, Obi or Kevin, with the sales force optimization process, any incremental color just in terms of how this process has progressed over the last couple of months? And just any further visibility in terms of the proportion direct versus distributor ratios in the different territories internationally?

William M. Greenman

Yes. That's still in process, but I think we're making definitive progress towards resolving these markets to the direction we want to go in. We have hired several serious FTEs for certain distributor markets, and so they're on board now. And so I think that will help. And then in the markets where we want to go direct, that's something that will likely take place in the second half of the year, as Kevin mentioned. But we're making good progress towards going direct in certain countries.

Joshua T. Jennings - Cowen and Company, LLC, Research Division

Okay. And then just with the SaBTO documents that were made public, there's a little bit of a mixed message in there, and I think there's a wide range of interpretations. But is there any way you can help us out with any anecdotal conversations you've had with the SaBTO committee or with the NHSBT in terms of how they're thinking about this document and how that could influence the potential for INTERCEPT adoption once these bacterial testing contracts run out in 2015?

William M. Greenman

Yes. I think that it was actually -- if you -- I don't know if you probably had, Josh, read the entire SaBTO report. I think in there, there's a lot of very positive recommendations about the utility of the technology, both operationally and from a safety and efficacy perspective. And as I mentioned in my prepared remarks, that wasn't the case in 2010. So I think we've made -- come a long way with the NHSBT. I think the operational evaluation right now is progressing as expected, and I think from what we've heard, it's working well. I think at a higher level, just to maybe restate this, that the U.K. SaBTO advisory group as far as the Department of Health in the U.K. they typically review new technologies in a similar fashion to the way NICE does. So there's a very strict threshold for cost effectiveness of GBP 25,000 per year. And so, as I mentioned in my prepared remarks, no blood safety interventions really can achieve that. The most recent of which, in 2010 and 2011, was bacterial culture platelets. And so SaBTO didn't recommend that either and the NHSBT still went ahead and implemented the technology. So I think to summarize, the outcome of the NHSBT or the U.K. SaBTO report, they did recommend INTERCEPT as a technology and it encouraged the NHSBT to develop their framework for assessing INTERCEPT from an operational cost savings perspective, and that's what we believe is under way.

Operator

Our next question will be coming from the line of Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Have you guys -- have you lost any customers through the transition process? And can you just talk about if there's any risk of that over the next couple of quarters?

William M. Greenman

Yes, we don't believe there's a lot of risk for that. We have not lost any customers since we started this process, and I think it's really just sort of getting into markets where we choose to go direct, getting those people on board. And I think it's safe to say also we already have people on board in those markets. So we're not starting from a complete standstill, and I think, by and large, we know all the customers very well. So I think it's just a function of working through the transition plan with the distributors in the markets that are affected and then moving forward. So I think it's, as I mentioned, again, in the prepared remarks, this is the decisive action that we decided to undertake and I think we're going to be better off for it in the long term.

Zarak Khurshid - Wedbush Securities Inc., Research Division

That's great to hear. And then I couldn't tell from the press release, but how would you characterize the other parts of Europe, Germany, Switzerland, Scandinavia, et cetera? Are things getting better or worse there?

William M. Greenman

Well, I think we continue to see adoption in places like Switzerland and Austria. So for Switzerland, they still have yet to implement 100% for INTERCEPT plasma, so there is opportunity there. We're seeing a number of customers coming online in Austria. And the discussion in the Nordic countries is also progressing. Obviously, we'll announce when we have customers contracts in hand for routine use, but things seem to be moving in the right direction. Germany continues to be a difficult market just because of the competitiveness between blood centers there and the lack of reimbursement for INTERCEPT. And so, as you probably know, for medical devices in Germany, it's a very long process to secure reimbursement. We've also been at it for a while. And we ultimately believe that large blood services who take on INTERCEPT will realize significant cost savings operationally. And so that's just something we have to demonstrate better in Germany.

Zarak Khurshid - Wedbush Securities Inc., Research Division

Got it. And then as a follow-up, I'm not sure if you mentioned it in the press release. I apologize if you did, but the illuminator sales, if you could break those out?

Kevin D. Green

Yes. So this is one of those unusual quarters where disposable kits were a disproportionate amount. They're normally, as you recall, about 90% of our overall revenue. This quarter, they were closer to 97%. Disposable kits.

Zarak Khurshid - Wedbush Securities Inc., Research Division

And was that impacted by the distributor transition?

Kevin D. Green

Not necessarily. Certainly, in those distributor territories where we're transitioning, we're doing so in part because we want to address new customers and don't see that -- those new customers coming online as fast. So I think that is a contributing factor. But if you look at kind of quarter-over-quarter, we don't see that, that decision had a meaningful impact on the illuminator placement. It just was a onetime event.

Operator

[Operator Instructions] Our next question will be coming from the line of Jeff Elliot from Robert W. Baird.

Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division

Kevin, first, on the direct side of business, can you give us for any feel for how that performed in the quarter? I get the dynamic on the distributor side but how did the direct side do in the quarter?

Kevin D. Green

Well, the direct side year-over-year was up, as well as sequentially. Where we really saw the impact was on the distributors. Year-over-year, it was down significantly, and that's in line with our guidance for the year, and something that we contemplated in those -- in that conservative guidance.

Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division

Got it. That's helpful. And then, Obi, can talk you about -- have you seen any response, competitive response? You've swapped some distributors now or you're planning to do that, but have you seen any response in the market from those distributors that you just swapped out or one you suspect that they could be next?

William M. Greenman

No. I mean, it's -- the discussion thus far have been amicable. We're obviously trying to take a reasoned approach forward. Obviously, it's a balance due -- in certain markets we may choose to actually give them more resources to effect a better outcome. I think they're largely receptive to that. And then in other markets where we're planning to transition to a direct sales force, obviously, it's longer-term lost revenue for them, but I think there are other opportunities from a collaboration perspective. So we're just trying to balance this across each one of the distributor relationships we have.

Jeffrey T. Elliott - Robert W. Baird & Co. Incorporated, Research Division

Got it. And then on the red blood cell enrollments, what steps can you do to accelerate the enrollments? And how much further could you accelerate that in terms of timing?

William M. Greenman

Yes, I think that on the COGS side is what you're referring to, Jeff, and I think there, we're looking at bringing up some additional sites so that we have additional balance of new patient populations to draw from. But I think other thing that we alluded to on the call is that we are fundamentally sort of reassessing our CE Mark regulatory strategy to see whether there's a way that we might be able to accelerate that independent of the pace of the chronic blood transfusion study. And I think, obviously, we'll update you on the next quarterly call as it relates to that or whenever we have more clarity. But I think there are ways we might be able to do that. And as is well, it's looking at what we would do in the post-approval phase from a CE Mark perspective.

Operator

Our next question will be coming from the line of Brett Reiss from Janney Montgomery Scott.

Brett Reiss

The future distributorship contracts, is there any way to include some sort of prophylactic clause or language that would protect us from the distributor entering into a business that would potentially compete with us?

William M. Greenman

Yes, we obviously look at that closely because we want to make sure that our interests are aligned with our distributors. And I would say, we won't speak to this specific language in our distributor contracts, but we look at that, as well as performance milestones as well. So I think we are pretty circumspect with regard to how we enter distributor relationships. And some of those are affected by events that are beyond our control.

Kevin D. Green

And I think it's important to note that I don't want you to leave with the impression that we haven't had those kind of safeguards in place in the past.

Brett Reiss

Okay, okay. And could you just give me a little background on -- I may be mispronouncing it, Nipro? Who are they, and why are they a good partner? And did you knock on their door or did they knock on your door? How did that come about?

William M. Greenman

Yes. Nipro is one of the larger medical device companies in Japan. It's a global business. They make essentially dual chamber syringes. They make containers for a number of different pharmaceutical companies. It's obviously a listed company. It's multibillion-dollar company with thousands of employees with manufacturing plants throughout the globe. That's actually a discussion that has evolved over the last, I'd say, 5 years. And what we've been looking to do is to really make the INTERCEPT red cell system very, very simple to use for large-volume blood centers. And we believe that this reconstitution kit design that we are collaborating with Nipro on will not only make a fairly very easy to use process available, but someday it would be able to be done in both large-volume blood centers, as well as small-volume blood centers around the world.

Brett Reiss

Since you've been talking to them for 5 years, what -- why was the deal -- why was it good to enter into the deal now for each of you?

William M. Greenman

I think it was just the comfort level. Certainly, the Japanese respect the duration of our discussions and the relationship that has arisen over the course of 5 years. I'd say that was a strong factor in their decision making, because once they commit to something, they commit to something. And then I think at the same time, there was some feasibility issues that we're still working through with regard to the design of the reconstitution set that they wanted to get comfortable with before they would commit.

Operator

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

William M. Greenman

Thank you for joining us today. Once again, we look forward to updating you again on our next call in late July. Thank you.

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cerus Management Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts