Cerus Corporation (CERS) is a biomedical company focused on commercializing its INTERCEPT Blood System to clean transfusion blood. The system is designed to reduce the risk of transfusion-transmitted diseases by inactivating a broad range of transfusion threats, such as viruses, bacteria and parasites - like hepatitis B and C, HIV, and West Nile - that may be present in donated blood. Cerus currently markets and sells the INTERCEPT Blood System for both platelets and plasma in Europe, the Commonwealth of Independent States, the Middle East and selected countries in other regions around the world.
My thesis on Cerus is simple. Clean blood for transfusion is essential for a safer global population. Cerus' solution clearly works for plasma and platelets as it is being used successfully in a first world nation like France. The company experienced a significant revenue ramp last quarter and management believes profitability is achievable on platelet uptake in France alone. From a recent article on Marketwatch:
"It would just take a couple of key customers to start adopting it to get us there," said Greenman.
Greenman said in particular, the company was hoping French health authorities would soon recommend Intercept be used in all of its blood-platelet centers. InterCept is currently used in only 10% of France's platelet centers, as opposed to 60% of its plasma centers.
"If we got the business for France for platelets, we'd be profitable," said Greenman
Red Blood is the next catalyst
While the company sees the potential for significant growth and profitability from existing INTERCEPT approvals in smaller markets like France, there are much larger opportunities for Cerus with wider scale approval for the technology for use with red-blood cells. From the same article:
Meanwhile, Cerus has been moving to get InterCept approved for processing red-blood cells for transfusions, a much larger market estimated to be worth $1.6 billion in Europe alone. Phase III clinical trials are slated to begin this summer.
"I think what investors are most excited about right now is our red-blood cell program," said Greenman, in a recent interview with MarketWatch.
In its 2010 annual report, Cerus estimates the market for processing red-blood cells for transfusion in Europe at $1.6 billion. If Cerus is able to gain approval for this market, it is clearly going to command a much larger market valuation. At the current price of roughly $4/share, the company's market valuation is approximately $220 million. CEO Greenman said the company would be profitable on $55-60 million in revenues on platelet uptake in France alone. The company estimates the red-blood market is 3x the size of the plasma/platelet market, clearing the way for revenues to top $200 million should INTERCEPT gain approval for red blood in Europe. Estimating a price to sales multiple of 4-5x, which is consistent with the current multiple and industry multiples, that would place Cerus market valuation somewhere close to $1 billion, or 5x today's price.
All of the current success and future growth we have discussed only factors the potential for the company's products in Europe. While the company has scaled back its efforts for FDA approval in recent years due to costs, management is still slowly putting together the pieces required to complete a Phase III trial as evidenced by this recent press release.
"We look forward to working with FDA to finalize the Phase III study protocol to support U.S. licensure of INTERCEPT red cells for support of patients with chronic anemia," commented Dr. Laurence Corash, Cerus' chief medical officer. "Chronically transfused patients are at increased risk both from newly emerging pathogens, such as dengue virus, and from known infectious agents, such as Babesia, for which there are no currently licensed tests. Pathogen inactivation of red cells offers a potential new treatment option for this vulnerable patient population, who may face lifetime exposure to blood transfusion."
While this is a limited market, you have to believe the company is slowly building its case for an eventual run at FDA approval should INTERCEPT receive red-blood approval in Europe.
The company estimates the global market for INTERCEPT for red blood transfusion at $4.7 billion in its 2010 annual report. That is roughly 3x larger than the market in Europe where we estimated based on current market share the company could achieve $200 million in revenues and a $1 billion market valuation.
It would likely take a partner with deep pockets to tackle FDA approvals, but if the market is 3x as large globally than in Europe, than the there is the possibility that CERUS could achieve revenues of over $600 million on global approval for INTERCEPT for red-blood treatment. At that level of revenues I estimate the company could be worth between $2 billion and $3 billion. That is 10x-15x higher than today's quote or roughly $40-$50/share.
Given the success of INTERCEPT in France and the prospects for near-term profitability in that limited market with approvals only for plasma and platelet, I don't believe there is much downside to the shares at current levels. With the prospects for significant revenue growth on more widespread INTERCEPT use and the prospect of future approval for red-blood and eventually the potential for a U.S. approval, CERS is the best risk-reward story I have encountered in a long time.