I usually write about short side opportunities, but I discovered Cerus (CERS) as a contrarian or short side play on the blood supply in developed countries. The blood industry in these nations, especially in the U.S., is technologically backward and very vulnerable to new diseases and pathogens. Cerus solves these problems, right now, for blood banks preparing platelets. The company may be able to do the same for whole blood in the coming years.
The company developed and markets a product called the INTERCEPT System, a blood pathogen inactivation system that kills things such as HIV in the preparation of blood platelets. The system is approved and/or will be in use in many large European countries, including Germany, France and Switzerland. I expect the company to begin European whole blood trials in the middle of this year. This market is much larger than the market for blood platelets; around $2 billion per year in Europe compared to $500 million for platelets and plasma.
Revenue in Q3 was $5 million and the company expects total 2010 revenue to be up 35-40% from 2009 at more than $20 million. Gross margins increased past 50% for the first time in Q3. Expenses fell both in the quarter and for the first nine months of the year. The company lost $3.8 million in Q3 and the loss in the first three quarters was $14.3 million. In Q3, management also bought back marketing rights in Asia, and that means the land of terribly tainted blood, China.
Blood borne disease is something the public and the Street think about only when there is a gross failure or a new threat. The new threat is XMRV, increasingly linked to or seen as the cause of Chronic Fatigue Syndrome. There is enough scientific proof and regulatory concern that many nations, including the U.S. and UK, have banned CFS patients from donating blood.
France and possibly Germany will be making major moves to secure their blood supply this year and Cerus is a clear potential winner as these countries spend money to do so.
What about the U.S.? Several years ago the company hit its endpoints in a Phase III clinical trial for INTERCEPT only to have an approval derailed by concerns over safety, concerns proven groundless with real world data that seems to have no place in the FDA approval process.
In 2010 the company submitted a plan for new Phase III trial, got approval from all but one person on the examining panel, that one person being an FDA staffer who marked his territory and put the whole process into limbo. If memory serves me correctly this was the same staffer who opposed Tarceva and said it would not succeed.
In fairness to the FDA, Cerus' management has been equally inept in dealing with regulatory issues in the U.S. The company continues to refuse to push the FDA through political or public channels even though it receives grants from the U.S. military to fund research in its whole red blood program, the most recent award for $1.4 million. There is an irony here – in Iraq and possibly Afghanistan, U.S. blood is being used in hospitals that treat civilians. Imagine the consequences if the blood was tainted? Another irony is that the head of the FDA is one of the nation’s experts on issues related to mass epidemics and bio warfare. The bottom line is the company is focusing on Europe and unless management wakes up, the U.S. will be a market it attacks at normal speed.
Why is Cerus my stock of the year? There is no scientific and virtually no regulatory risk facing the company. Sales are increasing every quarter with major sales potential this year in France and Germany. The whole red blood and U.S. regulatory programs are pure upside that is not factored into the stock price.
IN 2010, the stock sold off after a stock offering that was needed to fund the whole blood trials. The previous high on the stock was during the bubble years, north of $80, the more rational high was around $15. It now trades around $2.50, consider it a perpetual option with gigantic upside potential.
There are risks – a sharp market correction will hit any company not yet profitable and delays in European acquisition plans for INTERCEPT could hurt.
Disclosure: I own Cerus stock