Cerus Corporation (CERS) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Cerus Corporation’s Fourth Quarter 2015 Earnings Conference Call. At this time, all participant lines are in a listen-only-mode to reduce background noise. But later we will be conducting a question-and-answer session. Instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to introduce your first speaker for today, Lainie Corten with Investor Relations for Cerus. You have the floor ma’am.

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; Richard Benjamin, our Chief Medical Officer; and Larry Corash, our Chief Scientific Officer. Cerus issued a press release today announcing our financial results for the fourth quarter and year ended December 31, 2015 and also 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 expectations for its products, prospects and future results, including 2015 revenue guidance and related assumptions; expectations for future demand and revenue growth; operating SG&A and R&D expenses; sufficiency of cash; foreign exchange rates; Cerus’ U.S. commercialization theme; customer implementation and the scope and timing thereof; customer support initiatives, U.S. customer contracts, the timing of U.S. revenues; resumed sales growth in Europe, including revenue inflection points and new customers; expected or anticipated regulatory submissions and approvals and the timing thereof, including the U.S. label extension submissions and a potential CE Mark submission for and approval of the red blood cell system; commercial launch of new products, including the red blood cell system or in new territories; Cerus’ planned Phase 4 study, including the timing and scope thereof, and FDA guidance document and the timing and contents thereof; BLA submissions by U.S. centers and the potential availability of INTERCEPT red cells under IDE. 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 in Cerus’ current report on Form 10-Q filed with the SEC on November 6, 2015, under the heading 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 opening remarks from Obi, followed by Q4 and year-end financial results from Kevin. Next, Richard will provide a Zika virus update and will conclude with 2016 outlook and final remarks from Obi. And now, it’s my pleasure to introduce Obi Greenman, Cerus’ President and Chief Executive Officer.

Thank you, Lainie and good afternoon. 2015 was an important year for Cerus in many ways with both successes and some challenges. We entered 2016 as a fundamentally different company and are poised to transform even more dramatically over the next 24 months as our INTERCEPT commercialization plans in the U.S. are executed. In addition, our anticipated CE Mark approval for red cells would complete the INTERCEPT portfolio for the EMEA market allowing us to address the full $2 billion market opportunity for pathogen activated blood components in that regions. Since our approvals, FDA approvals at the end of 2014 for platelets and plasma, we now have signed contracts or framework agreements with organizations representing an approximately 60% of the market in the U.S. a collective annual footprint of nearly 1.4 million INTERCEPT kits. We have also established outpatient reimbursement for INTERCEPT platelets and plasma in the U.S., early INTERCEPT adopters report that hospitals are accepting premium pricing and believe that the 2016 P-code rates have established in acceptable pricing benchmarks. Our U.S. customers include some of the largest providers in the world. For example, the American Red Cross supplies over 800,000 platelet units per year to over 2,600 hospitals, Blood Systems Incorporated through its affiliates annually distributes 240,000 platelet units to more than 700 hospitals. Any one of these is larger than the majority of our core EMEA country markets. Our contract with American Red Cross is particularly transformational to Cerus and is perhaps one of our greatest single achievements. We are extremely excited about this partnership and what it offers to both parties. I would like to spend a few minutes on our understanding of the Red Cross’ plans for INTERCEPT. The Red Cross has ordered the first Illuminators to allow initial implementation to start in Q2. They are making a strategic selection of manufacturing sites targeted for installation this year and are planned to rollout INTERCEPT in key markets. By late 2016, up to 25% of their total sites could potentially have INTERCEPT production capacity. As they see demand for INTERCEPT, the Red Cross has expressed that they want to be in a position to leverage their nationwide distribution capability. Initial manufacturing sites are being selected for their ability to serve multiple markets and scale production is needed in the near term. The Red Cross also plans to pursue BLA licenses for interstate shipment as quickly as possible estimating that in 2017 they will be well positioned to make pathogen reduced platelets available nationwide to any hospital customer requesting them. Hospital demand will drive their decisions on how quickly production will scale up in each region and nationwide. Stepping back, looking at the U.S. market as a whole, we have made rapid progress to date but are still early in our launch. With three of our early adopters now in routine use with INTERCEPT platelets, we are beginning to see the success of our commercial launch plan. While we are confident in our ability to support our U.S. customers, as they make the transition from contract signature to operational implementation to hospital roll-out, we’ve also seen these steps take a few quarters even for smaller centers with single manufacturing facilities and a limited number of hospital customers. You still need to obtain approval for platelets and 100% plasma to enable many of our customers to implement INTERCEPT. And we expect to see the first BLA applications submitted later this year. With all the competitive pressures between blood-centers will play in the market is unclear until more centers are in routine, also the impact of the Zika virus guidance and the possible revised bacterial safety guidance requirements have yet to play out fully. Therefore, we continue to regard 2016 as a market building year for the U.S. positioning us for more rapid growth potentially in the following years. We have recently seen sharply increased public concern about the expanding Zika virus epidemic in the Western Hemisphere, including the recognition of previously unknown neurologic health impacts such as Guillain-Barré syndrome and new-born Microcephaly. Pathogen reduction has a critical role to play in securing the safety and even more importantly is the availability of the blood supply from a continual onslaught of mosquito borne threats. I’ll now turn the call over to Kevin Green, our Chief Financial Officer to provide an update on the financials and guidance for 2016. And then Dr. Benjamin, our Chief Medical Officer to provide an update on the Zika epidemic, and the potential use of INTERCEPT to protect against the emerging virus epidemic.

Thank you, Obi. This afternoon, we reported Q4 revenue of $9.7 million, which represents a 22% year-over-year increase in INTERCEPT disposable kit demand. Full-year 2015 revenue was $34.2 million, within the range of our guidance of $34 million to $36 million and represents a healthy 15% growth kit demand over 2014. Reported revenue for 2015 was driven primarily by the European and Middle Eastern markets. Compared to 2014, 2015 dollar reported revenues were negatively affected by the weaker euro rate compared to the U.S. dollar Cerus’ reporting currency. We began the fourth quarter of 2015 with five signed U.S. contracts. By year-end, that number had more than doubled to 12 contracts and as Obi mentioned that momentum has continued into the first quarter of 2016 with the signing of five additional U.S. contracts thus far including Blood Systems Inc. and the American Red Cross, which account for a significant proportion of the distribution of blood components in the U.S. We’re continuing to execute on our U.S. launch plans and expect the majority of our U.S. revenue this year will be driven by Illuminator installations in contrast to our mature INTERCEPT markets, where disposal kits represent upwards of 90% of sales. Until we gain further operational experience with these U.S. customers and also without being able to get understand the potential impact of the Zika epidemic or potential FDA bacterial safety guidance, we will continue to be conservative regarding U.S. revenue projections. As a result, we are currently providing 2016 global revenue guidance of $37 million to $40 million. This assumes relatively flat EMEA revenue driven by continued softness in the Russian and CIS markets with 2016 growth driven primarily by our U.S. and emerging markets in the Lat-Am and A-PAC regions, with U.S. adoption contributing to the growth in the second half of the year. Now, I’d like to turn back to our 2015 results, starting with gross margins. Gross margins for the fourth quarter were 36% compared to 31% in the prior year. For the full-year 2015, gross margins were 31% compared with 42% for the full-year 2014. We recorded certain period charges for expiring product and certain minimum purchase commitments which resulted in a 10% and 7% reduction to reported gross margins for the quarter and year respectively. In contrast, these types of charges had a negligible impact in the previous year. As we’ve mentioned earlier in the year, the majority of these charges were driven from reserves for potentially expiring product built over one year ago in contemplation of Russian and CIS market expansion, which as I mentioned earlier is experiencing softness. Our reserves contemplate continued headwinds in those markets and therefore we do not expect similar charges of this magnitude in the future. In addition, when compared to the previous year, full-year 2015 margins were negatively impacted by approximately 5% from the decline in the value of the euro relative to the U.S. dollar. Turning now to operating expenses. Total operating expenses for Q4 were $18.5 million up from $15.9 million during Q4 the prior year. Total operating expenses for 2015 were $71.8 million compared to $59.7 million for 2014. The increase in operating expenses was driven by SG&A costs, incurred in support of our U.S. commercialization efforts. While we expect our SG&A cost to begin to stabilize, we anticipate seeing the full-year impact of 2015 hires in 2016, leading to some year-over-year growth. In addition, the level of research and development costs are expected to continue to grow to support label claim expansion in our post marketing study in the U.S. and as we seek a potential CE Mark approval for our red blood cell product. Net losses for the quarter were $14.8 million or $0.15 per diluted share. Comparatively, net loss was $20.2 million or $0.26 per diluted share in Q4 of 2014. For the year, net losses were $55.9 million or $0.61 per diluted share compared to $38.8 million or $0.61 per diluted share in the prior year. The reported net losses for 2015 were impacted by non-cash charges of $1.1 million from the warrant accounting and by non-cash gains of $3.6 million for the full-year. As of December 31, 2015, we had no remaining outstanding warrants. And therefore we do not expect mark-to-market adjustments of this nature going forward. Now, looking at the balance sheet. We ended 2015 in a strong position with cash and short-term investments of almost $108 million compared to $107 million at the end of September 2015 and approximately $51 million at the end of 2014. According to our current projections, we anticipate that we had at least two years’ worth of cash at December 31, 2015. We believe that we are extremely well positioned to execute on our initiatives including continued market penetration for INTERCEPT platelets and plasma in the U.S. and importantly bringing the red blood cell product to the market in the EU. And now I’ll turn the call over to Dr. Richard Benjamin. Richard?

Thank you, Kevin. Recent experiences with dengue, Chikungunya and Zika viruses have highlighted the potential threat emerging pathogens posed the U.S. blood supply. And each new epidemic has been recognized potentially has not been immediately available to guarantee the safety of donated blood. And donor deployment measures have reduced the rate of blood donors needed to maintain an adequate supply. The Zika epidemic has proven to be even more challenging than previous epidemics due to the high frequency of asymptomatic infections among potential blood donors. Heightened public concern has been driven by pull from severe neurological impacts like Guillain-Barré syndrome and Microcephaly as well as sexually transfusion transmission of the virus. National authorities like the FDA are actively decisively to intervene, calling for rapid implementation of safety measures and placing further pressure on blood centers. In the blood safety guidance issued last month, FDA requires rapid nationwide deferrals of donors with Zika risk factors. Further in areas of active local transmission from mosquitoes, local blood collections must be suspended unless additional safety measures including pathogen reduction and Zika testing are implemented. With no approved Zika tests in the market, pathogen reduction for platelets and plasma are readily available solutions for areas like Puerto Rico, where local Zika transmissions have already been detected. The only alternatively is importing blood components from areas of lower risk in the Continental U.S. with complex logistics and susceptibility to weather interference. While the immediate crisis of supply these measures caused to Puerto Rico is very real. We have yet to fully understand the full impact Zika could have on the Continental U.S. blood supply. With FDA guidance requiring at collections held upon detections of even a single local case of Zika, Hawaii and certain Southern States could now be at detention risk of sudden reductions in their local supplies. The volume of blood cells that is currently produced in States like Florida, Texas or California would be difficult to replace, especially within the timeframe specified in the guidance. INTERCEPT process is being implemented at Servicios Mutuos, the largest blood collected in Puerto Rico to help maintain local platelet and plasma collections. We are in discussion with the FDA not only for platelets and plasma but also for the possibility that our red cell treatment could be made available under an Investigation Device Exemption or IDE. We are also investigating what federal funding might be available in light of the emergency supplemental request for Zika and how this might accelerate development of the red cell product. Depending on the course of the epidemic, these measures will become applicable in much broader geographic areas. And we see mainly on blood centers already actively preparing for the possibility of local Zika transmission. Turning to other U.S. updates, we are now enrolling PIPER Phase 4 study patients at both Yale and Vanderbilt. Over the past several months, the clinical and MSO teams have prevented contacts with U.S. hospitals as we recruit additional sites for PIPER. They have strong interest in INTERCEPT, especially to reducing the risk of [indiscernible] transfusion disciplines. We expect FDA’s upcoming revised bacterial guidance will sort of raise the awareness of this important transfusion safety issue on the role of pathogen reduction. Based on FDA’s most recent target for 2016, the revised guidance document is expected sometime this year. And now I’ll turn the call back over to Obi for closing remarks.

Thank you, Richard. Our path forward in U.S. for platelets and plasma is clear. We needed to bring product label claim extensions like players of 100% plasma to fruition, support our customers if they rollout INTERCEPT in the coming months, be poised to take advantage of FDA guidance documents that can help drive use of pathogen reduction. By the end of 2016, we expect that multiple hospitals will follow the NIH’s example and convert to 100% INTERCEPT platelet. In addition, to the national rollout of INTERCEPT anticipated from the Red Cross, many other blood centers across the country will start to make INTERCEPT broadly available nationwide. As blood centers take steps to protect transfusion recipients from Zika and other emerging viruses, we are there to help and may even be able to treat their red cells under an IDE study. In our EMEA markets, we are looking forward to Gualtiero Garlasco’s new leadership perspective on the business to reinvigorate our approach as the team focuses on key inflexion points like potential adoption in South Africa and further growth in France. The European team is also preparing for the potential launch of INTERCEPT red blood cells to getting to integrate this new product into our sales and marketing plans for 2017 in parallel with the final preparation for that regulatory submission this year. We continue to expect approximately 12 months for that review, for the second half 2016 submission resulting in a CE Mark approval decision in the second half of 2017. We’re most excited about the potential INTERCEPT red blood cell launch, not only for the $1.4 billion market opportunity it brings but also the added value of the complete INTERCEPT portfolio across all three components and the synergies and leverage this added for us. Finally, we continue to make progress in Latin American and Asia as well. Our recent Brazilian approval comes as that country is struggling to respond to the Zika epidemic, and secure its blood supply. And we believe some Brazilian centers will begin to use INTERCEPT as a defense against the emerging pathogen in the near term. We also recently completed and filed our SFDA submission in China, where it has been accepted for review. In both of these regions emerging pathogens are an important blood safety issue and many of these countries are also influenced by standards established by U.S. blood centers and the FDA. In summary, we expect 2016 to be a dynamic year for Cerus, positioning us to transform dramatically in the 2017 and 2018 timeframe as we continue to execute on our commercial plan and potentially launch INTERCEPT red cells in Europe. Operator, please open the call for questions.

[Operator Instructions]. Our first question comes from the line of Drew Jones from Stephens Incorporated. Your line is now open.

Thanks, good afternoon guys.

Hi Drew.

On the guidance, just to be clear, the U.S. expectation, is that somewhere between $3 million and $6 million in 2016?

Yes, Drew, we haven’t broken this out by region. And part of the reason for that is that with American Red Cross representing almost 50% of the market and just having signed them up in the last month, we see it’s going to take a couple of quarters to get them going so that we have an understanding of what the pace of adoption looks like. And so, given that, we also have other areas of the world that are coming online as well just like Latin America and A-PAC. And so, what we’ve provided in the script today was sort of insight into the growth that we see in Europe and that’s been relatively flat and the remainder of that coming from other parts of the world.

And then in the Zika affected areas, can you tell us about your conversations as far as plasma is concerned, is that something that they are sourcing from other locales or is there potential there to get maybe some pathogen reduction plasma as well?

Yes, certainly that’s been the plan in Puerto Rico, so the contract we signed last week, I think it’s important to note that within five days of signing that contract as of today surveys show that routine use of INTERCEPT. So, I think we’ve established a record for us as far as implementation. And that’s for platelets and they plan to implement plasma later this week.

And then last one from me, on red blood cells, could Dr. Benjamin, could you give us a little more color around the potential use of an IDE this year for RBC? And then also an update on Phase 3 trial design domestically for red blood cells?

Certainly, thank you for that question. As you know, we’ve completed the Phase 3 trial in Europe and are planning on submitting for CE Mark in the second half of the year for red cell program. We have been in discussions with the FDA around accelerating the use of a red cell product under IDE for Puerto Rico relatively it’s too early to say much more about these conversations, we’re still looking at what would be an optimum design. And clearly would like to see implementation in Puerto Rico and the company clearly would like to head towards an FDA approval product by the end of IDE. So, those discussions are still underway and I think it’s too early to comment on what the final designing looks like if the FDA accepts it.

Thanks guys.

Thank you, Drew.

Thank you. Our next question comes from the line of Thomas Yip from FBR & Company. Your line is open.

Hi everyone, thank you so much for taking my questions. Can you remind us what are your most important label expansions that you are looking for in the U.S. in 2016 and what specifically are required to get these expansions?

Thanks Thomas. So the one that we’ve been working most aggressively towards is platelets and 100% plasma because a big part of the A-label is platelet collection market, would require that. And a number of blood centers included in some of the big ones that we just signed up are not looking to go to platelets in platelet added solution. And so, that’s really critical. And that’s really the priority for 2016. We are expecting an action date in March for that approval and hope to have something announced soon.

Okay, great, thanks. I want to switch gears a little bit and talk about numbers, I see that there is 22% year-to-year kit demand increase but there seems to be a disconnect between the year-to-year revenue growth. So, obviously as you pointed out in your remarks though, there are some foreign exchange fluctuations but I’m also going to guess perhaps Illuminator orders could fluctuate from year-to-year as well. But other than those two factors, are there other factors that could explain this disconnect?

No, no, it’s primarily FX, if you look at simple averages over the two years, 2015 was down roughly 16% from the prior year. So, that has a negating effect. And the 22% Q4-over-Q4 and 15% full year-over-full year. So that explains the relative flatness in reporting revenues.

Okay. That makes sense. Thank you again for taking my questions, and looking forward to another great quarter.

Okay Thomas.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Emily Stent from Robert W. Baird. Your line is open.

Hi guys. First question, could you walk through how much FX do you expect in 2016 on revenue and gross margins?

Sure Emily, this is Kevin. We don’t expect a whole lot, certainly the choppiness that we saw in margins and revenues in 2015 occurred in the first half of the year where we saw the euro plummet. As we look at it, we expect that we’ll be in the 1.10 range which is where the FX rates currently are. And that’s where we largely were for majority of 2015. So, we don’t expect a whole lot of FX impact.

Okay, great, thanks. That makes sense. Next, could you provide any color on 2016 cash burn?

Yes, I think it’s going to be fairly consistent to what it’s been in 2015 which was roughly $50 million from operations. But of course that’s dependent on the top-line to the extent that we have large revenue inflexion points that come on above and beyond what we’ve guided that number obviously changes.

Okay, perfect. And then last one from me, do you have any additional timing details on at the A-label expansions for triple dosing, 7-day label plan etcetera?

Yes, those are both programs that we’re actively working on at the company. We are planning to launch the triple dose setting in Europe this year. But in the United States, really the focus is on us completing the work and getting the submissions in.

Okay, great. That’s it from me. Thank you.

Thank you.

Thanks Emily.

Thank you. Our next question comes from the line of Karen Koski from BTIG. Your line is open.

Hi guys, can you hear me?

Yes Karen, hi.

Excellent. Congrats on a nice quarter. Just the first question is Obi, you mentioned in your script, potential competitive pressures now that you’ve got the American Red Cross onboard. They obviously have significant breadth in the U.S. Can you speak at all anecdotally as to how a small blood center would compete with the American Red Cross if they do not implement and adopt INTERCEPT?

I think it’s a good question. I think ultimately that it should be competitive if they do implement INTERCEPT. And then obviously some of these, what we’re already seeing is, there is a number of the major academic hospitals are looking to issue RFP specific to pathogen activated platelet components. So, I think that the real advantage that the Red Cross has just the breadth of their production capacity and then ultimately their nationwide distribution network. So that’s what is core to their strategy but it’s also something that we’re sort of prohibited from talking about because it’s part of the confidentiality of our partnership. We’re there to support them we’re obviously there to support other local and regional blood centers as well. We don’t have a dog-in-fight we’re just there to support our blood center customers.

Okay. And as kind of a follow-up, first of all your blood centers they are kind of waiting on the sidelines. What do you think they’re waiting for and if it is the bacterial detection guidance, given your discussions with FDA around red cells, it sounds like the relationship has certainly approved versus prior years. Do you have incremental confidence that that guidance document could be favorable?

Well, I think that the Zika epidemic certainly has taken pressure in the context of the issuance of our revised draft guidance for bacteria. I think as Richard alluded to in his prepared remarks, the FDA and HHS are acting decisively to protect the blood supply, not only in Puerto Rico but looking to establish, plans for what would happen when there is a local Zika transmission in the Continental U.S. I’m not really sure I’m answering your question around timing of bacterial guidance but I think ultimately what we’ve seen is that the customers that we have signed up have clearly done so in the context of replacing bacterial culture, replacing gamma radiation and CMV testing. And the associated implications on platelet supply logistics. And if you marry that then with the 2016 P-code rates that we have established, that really as I mentioned has established a pricing benchmark. And so we’re seeing more and more blood centers talking about $100 plus up-charge for INTERCEPT treated platelet components to their hospital customers. And that’s been received well.

Perfect. That’s very helpful. And then just my last question around the U.K. and France and other countries in Europe that have held out off on adopting INTERCEPT to some extent. Are there watching what’s happening in the U.S. and getting to kind of a hypothetical 60% penetration so quickly? And do you think adoption in the U.S. matters as they think about implementing?

Yes, ultimately I think they are very independent with regard to their decision making. That being said they do look at national sort of policies and standards as it relates to specifically bacterial contamination of platelets. And that’s what drove the U.K. to go to tender last year and unfortunately as you know that tender was essentially postponed as a function of some other priorities they had with regard to consolidation of their manufacturing operations. I do think that the upside if you will of Zika is that, it has reminded people and blood center specifically of the potential impact of emerging pathogens onto blood supply. And if you look at what it’s done to the availability of blood in Puerto Rico, with all products other than INTERCEPT treated products being imported into Puerto Rico as of this week, I think that just reminds people as to how tenuous blood safety and availability is without a proactive solution like INTERCEPT in place.

Great, thanks so much.

Yes, thanks Karen.

Thanks Karen.

Thank you. That’s all the questions that we have in the queue at this time. So, I would like to turn the call back over to management for closing remarks.

Well, thank you all for joining us today. We look forward to updating you again on our Q1 call in early May. Thanks very much.