Cerus: Prepared For A Watershed Event

Nov. 09, 2019 7:18 PM ETCerus Corporation (CERS)15 Comments

Summary

  • Cerus Corp recently announced their Q3 earnings with a miss on EPS on and a beat on revenue. The company has reiterated its full-year revenue guidance of $72M-$75M.
  • The FDA recently finalized a guidance letter concerning platelet storage in centers and hospitals. The company's INTERCEPT product is positioned to be the go-to product to regain compliance.
  • I point out several key reasons why INTERCEPT should be the new standard-of-care and how this regulatory decision will be a watershed moment for the company and shareholders.

Cerus Corp (NASDAQ:CERS) recently announced their Q3 earnings with a slight miss on EPS and a solid beat on revenue. Although investors should be encouraged by the company’s third-quarter performance, it is the FDA’s final guidance concerning platelet storage and transfusions that should have CERS investors feeling optimistic about the company’s future. Cerus is now in a position to reap the benefits of the FDA's new guidance with its INTERCEPT system.

I intend to review the company’s Q3 earnings and the market’s reaction to the news. In addition, I will go over the FDA’s new guidance and why Cerus should experience a watershed event from these new standards.

Q3 Results

Cerus recorded $18M in product revenue, which was up 17% from Q3 of last year. At the end of Q3, the company’s 2019 product revenue has totaled $53.7M, which up 21% from 2018. The company’s platelet kit sales accounted for roughly 85% of revenue, with Illuminator sales having a strong showing. As a result, Cerus reiterated their 2019 full year product revenue guidance of $72M-$75M, which would be an 18% to 20% increase over 2018.

Cerus recorded a net loss of $18M that added to the year-to-date net loss of $54.3M. The company stated that they expect cash used from operations to be closer to $10M in Q4. Cerus finished the quarter with $85.1M of cash, cash equivalents and short term investments on hand, which Cerus believes is adequate to fund the company for at least two years.

To me, the company’s Q3 earnings report looked to be nothing but positive numbers and business updates. However, the market wasn’t as impressed and the share price has continued experienced slow bleed over the past week (Figure 1).

Figure 1: CERS 30 min (Source: Trendspider)

Perhaps the market was expecting better results for Q3 and they see stock as being overvalued for its current rate of growth. Admittedly, I believe CERS is a bit overvalued for its projected 2019 revenue (Figure 2).

Figure 2: CERS Annual Revenue Estimates (Source: Seeking Alpha)

At this time, CERS has forward price-to-sales of ~8.5x for 2019, which is higher than the sector’s average 5x. Therefore, I can see why the market isn’t buying up CERS hand-over-fist. However, the long-term outlook for CERS looks enticing, with the Street expecting the company to record steady revenue growth in the coming years. I don’t believe these estimates have factored in the potential watershed event from the FDA guidance, so I expect the company to experience stronger revenue growth in 2021 and 2022 than what is on the table.

FDA Guidance

Following the final FDA guidance document, Cerus’ INTERCEPT is in position to be the new standard-of-care for platelet transfusion safety in the United States. In eighteen months every single one of the 2.6M platelet units collected each year in the U.S. needs to be in compliance with the FDA’s new standard.

The final FDA guidance document instructs transfusion services to meet the new requirements to ensure that the risks of bacterial contamination of platelets are being reduced. The guidance requires these centers to perform processes that are complicated and will require an increase in man-hours.

Cerus believes the simplicity of the INTERCEPT system along with its protection against blood pathogens will be a clear solution to the new guidance.

Watershed Event

Today, the majority of U.S. blood centers and hospitals are not in compliance with the FDA, and the deadline is March 31st, 2021. Therefore, these centers and hospitals must take action and figure out what their plan is to have these services on-site. The final guidance makes a compelling case for INTERCEPT to logical choice to become compliant.

Figure 3: FDA Guidance (Source: CERS)

Cerus has received feedback from hospitals indicating they prefer ready to use platelets that do not require added technical procedures at the hospital. INTERCEPT does not require a hold time because its products don't need bacterial testing (Figure 3).

INTERCEPT available time for transfusion is 5 to 5.5 days, whereas the other two single-step options necessitate bacterial culture testing with 36-48 hour hold times and 12 hours of culture incubation in advance of transfusion. In addition, all bacterial cultures must be monitored until their expiration, which will necessitate additional equipment and personnel to manage the increased number of cultures. If a positive culture is detected in the tests, the hospital must withdraw all the components associated with the positive culture. Obviously, this would become a huge problem if those platelets have already been transfused.

Figure 4: INTERCEPT Metrics (Source: CERS)

Overall, INTERCEPT has the most promising metrics with no hold time, shortest time to transfusion, available in 5-5.5 days for transfusion, and no need to perform bacterial cultures (Figure 4). Considering the points above, the guidance could direct a large percentage of the remaining market to Cerus and INTERCEPT.

Can Cerus capitalize? Cerus has about 17 months remaining in the compliance period to prepare their current clients and potentially new INTERCEPT customers for the transition. According to management, the company’s hospital affairs team is working on hospital targeting and creating an onboarding schedule to simplify the conversion of these clients to INTERCEPT platelets. In addition, Cerus has improved the company’s supply chain by increasing inventory levels just in case Cerus experiences a substantial spike in demand.

Downside Risks

My primary downside risks still come from the lack of hype that goes with industry. The company is not going to generate enough attention to inject some momentum into the stock. The recent FDA guidance is probably the biggest news event for the stock, yet, there is little-to-no chatter about the decision and how Cerus could corner the market. Instead of a surge in share price, the market has essentially ignored CERS. The lack of hype or attention could make CERS a very humdrum investment.

Conclusion

Cerus has a full list of work to do over the coming period in 2020 and 2021 to help the company customers manage the transition to the FDA guidance compliance. Cerus is on the road to make INTERCEPT the standard-of-care and aiming at a nationwide conversion to INTERCEPT like in France at the end of 2017. If this occurs, Cerus will not only become the market leader but will have established strong relationships to help launch their other product candidates in the coming years.

It appears as the market and the Street hasn’t responded to this news yet, or they are unaware. Perhaps the steady revenue growth over 2019 has lulled the market to sleep on CERS. Consequently, I see CERS to be undervalued when considering the potential impact of the FDA’s decision on the company’s future revenue. Therefore, I consider CERS to be a strong buy at these prices.

This article was written by

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7.56K Followers
Diagnosing the market to compound capital in the healthcare sector.

After years of working in the medical field, I have developed a passion for biotech and lifesaving therapies. Now, I am a full-time healthcare investor who is in search of the next breakthrough therapy, device, or pharmaceutical. My trade focus is around catalysts and potential acquisitions. In addition, I provide a marketplace service, Compounding Healthcare through Seeking Alpha.


Disclosure: I am/we are long CERS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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