Cerus Corporation (CERS) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Cerus' Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the conference over to Lainie Corten, Investor Relations for Cerus. Please begin.

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; and Carol Moore, our Senior Vice President of Regulatory Affairs & Quality. Cerus issued a press release today announcing our financial results for the fourth quarter and year ended December 31, 2016 and also describing the Company's recent business highlights. You can access a copy of this announcement on the Company Web site at cerus.com. I'd like to remind you that some of the statements we will make on this call relate to future events and future performance, rather than historical facts and are forward-looking statements. Examples of forward-looking statements include, statements related to our 2016 guidance with respect to revenue, gross margin and cash burn, future product sales and volume, future regulatory related event, clinical trials and other product development activities, our commercial goals and initiative, including new contract, customer activity under existing contract and hospital implementation, the potential approval of our red cell product in Europe and the U.S, and commercial launch thereof and the timing of the foregoing events and activities. These forward-looking statements involve numerous risks and uncertainties that could cause actual events, performance and results to differ materially. The risks and uncertainties are identified and described in today's press release and under Risk Factors in our Form 10-K for the year ended December 31, 2016 that we expect to file shortly. We undertake no duty or obligation to update any forward-looking statements we make today. This call will be archived temporarily on our Web site and will not be updated during that time. On today’s call we'll begin with opening remarks from Obi, followed by a red blood cell development update from Carol. Then Kevin will provide Q4 and yearend financial results, and we will conclude with a 2017 outlook and final remarks from Obi. And now it’s my pleasure to introduce Obi Greenman, Cerus's President and Chief Executive Officer.

Thank you, Lainie. Over the past year, Cerus's business and prospects have advanced fundamentally. I’d like to start by reviewing our 2016 achievements and how these positioned the Company for significant growth going forward in both our U.S and international markets, as well as materially advance our INTERCEPT portfolio. Over 2 million platelet doses are produced annually in the U.S market, representing approximately $150 million market opportunity for INTERCEPT platelet. Unlike the pattern of adoption by National Blood Services in Europe and the U.S are contracts open the door for INTERCEPT production, but not guarantee the rate or extend of pathogen reduction adoption. Therefore, our teams need to support our customers both in the implementation of INTERCEPT production and in educating hospitals about the benefits of pathogen reduction, so they are ready to receive INTERCEPT platelets. Last year our sales team was very successful in securing contracts with the substantial majority of U.S blood centers. Though the initial phase of implementation was gradual, we experienced a rapid acceleration in Q4 with the installation of 36 illuminators during that quarter, nearly matching our total installations for the first three quarters of 2016. 22 centers are currently distributing INTERCEPT platelets and at the end of the additional 20 centers under contract, most now illuminators installed and are nearing their plan go live dates. The American Red Cross has continued to expand production within their network of manufacturing sites and is now producing INTERCEPT platelets at seven facilities. A total seven biologic license applications or BLAs have now been submitted including one by the Red Cross. As we begin to see the expected BLA approvals later this year, INTERCEPT will be available nationwide to any hospital wishing to purchase pathogen reduced platelets. We’ve now gained considerable experience in supporting hospital education and implementation, which we continue to believe is a critical success factor for maximizing adoption of pathogen reduction in the U.S. Accordingly, we’ve recently added headcount to our hospital focused team, investing an additional medical science liaisons to educate physicians and in a small hospital implementation team tasked with the streamlining -- with streamlined logistics of adopting a new blood product within the hospital, such as providing reimbursement coding information, advising on IT system changes, and provided in-service training for nurses. We estimate that 55 hospitals are now receiving INTERCEPT platelets with approximately 10 more likely by the end of Q1, and additional hospitals in the pipeline for Q2. The few smaller hospitals have converted to 100% to INTERCEPT platelets, a significant number of other hospitals are ordering the maximum amount currently available from their blood center supplier and are planning to convert completely as soon as adequate supply is available. We are encouraged by the demand coming from the hospitals for INTERCEPT platelets and their strong desire to fully convert to this new standard of blood safety for their patients and for the operational benefits conferred by a single inventory. While we continue to navigate the ongoing supply and demand challenges for blood centers, as they ramp INTERCEPT platelet production, a further expected catalyst for the U.S market is the plan publication of the final FDA guidance document. The final version of this guidance will officially establish recommended practices for U.S blood centers and hospitals, directly reduce the risk of bacterial contamination in platelets. The FDA recently confirmed that this is targeted for 2017 by including it in their annual list of planned guidance documents. Consistent with the language and the most recent draft, the final guidance is expected to specify a 12-month implementation period for compliance, as well as universal -- as universal use of either pathogen reduction or additional bacterial screening tests. The feedback we received from blood centers and hospitals continues the heavily favored use of pathogen reduction to comply with the new standard. markets. We believe we’re positioned: South Africa produces approximately 65,000 platelet units per year with over three quarters coming from the South Africa National Blood Service or SANBS and the remainder from the Western Province Blood Transfusion Service in Cape Town. Along with our distribution partner Ilex, we’ve been in active discussions with SANBS and believe that they’re now close to a decision on implementation of pathogen reduction. We also believe we’re close to hearing a decision in France. Similar to the U.S., France has been considering for the past several years both when and how to implement broader measures to reduce bacterial contamination of platelets. Currently no bacterial testing is used and routine INTERCEPT production is limited to approximately 10% of the plant supply, including the all SARS [ph] region and overseas departments. A national decision to address bacterial contamination will trigger significant practice changes across this large market of approximately 300,000 platelet units per year. For both of these national blood service decisions, we expect that the resulting contracts will provide clarity as to how quickly the product will be -- would be rolled out within each system. Importantly, compatibility with our existing blood center operations has already been extensively evaluated and a rapid implementation is achievable. if so desired for both blood services. Kevin will provide additional context about how we've incorporated these opportunities into our 2017 annual revenue guidance later in the call. As moment for pathogen reduction grows, we continue to receive strong interest in our INTERCEPT red cell development program. As blood centers anticipate the future possibility of three blood components for transfusion and hospitals take note of the advantages of simplified inventory management for blood components. I'll now turn the call over the Carol, for an update on red cell development, including the status of our CE Mark submission preparations, and also recent discussions with the FDA regarding our clinical trial program for U.S approval.

Thank you, Obi. In December, we announced the test results for our commercial qualification lots required further investigation, causing a delay in our CE Mark submission for red blood cells. Our submission plans were put on hold pending the results of our investigation. We’ve now completed this investigation and concluded that the original assay results were not valid based on the assay methodology. The existing method was adequate for releasing clinical lots that requires optimization and additional validation for more stringent standards associated with commercial product manufacturing. We believe the method improvement and subsequent testing could take until mid year and will be in a better position to provide guidance on the expected CE Mark timing on our Q2 call. All other elements of the CE Mark dossier are complete and ready, so successful completion of the testing to meet commercial release criteria is the gating step for scheduling a new submission date. Turning to the U.S., we recently met with FDA to discuss the package of clinical data required for future red cell PMA submission. We are happy to report that we received the key feedback that they were -- that we were seeking regarding the size and scope of the clinical data that FDA will require for approval. FDA also confirmed Cerus's proposal that the INTERCEPT red cell clinical package would support a future label for broad clinical use consistent with the use of conventional red cells. Coming out of that meeting, we believe we now have a clear clinical strategy for generating appropriate data in patients receiving acute and chronic red cell transfusions, as well as a diverse range of patients overall. Following the FDA discussions, the key components of our clinical program for U.S submission are as follows: first, our Phase 3 REDIS trial in Puerto Rico will provide an important body of data in diverse patient populations since this study accepts all adults rather than having a defined patient population. We expect to begin enrolling patients in Puerto Rico shortly and may start up additional study sites in the continental U.S later this year. Data from the first 150 patients randomized to the INTERCEPT red cell in the REDIS study will be reviewed by FDA before reinitiate the additional Phase 3 study -- Phase 3 U.S studies. This establishes an initial body of data for INTERCEPT red cells prepared according to U.S production methods, since other studies we provided to the FDA have been performed primarily in Europe according to EMEA production methods and protocols. Our second Phase 3 study is the recipe trial, we've mentioned before. We proposed a study size of approximately 400 cardiovascular surgery patients to demonstrate efficacy and safety for treatment of acute anemia. We expect to submit this protocol to FDA soon and receive approval later this year. Finally, the third major piece of the clinical dossier is a trial we’re calling [indiscernible], which will be designed to evaluate efficacy and safety for treatment of chronic anemia primarily in sickle cell disease. We had previously expected the study to include at least 300 patients, but the FDA indicated they are now willing to accept 150 patients in Phase 3 with a post-approval commitment to study an additional 150 patients supported with red cell transfusions for chronic anemia. Overall, we're tracking to roughly the same timeline for PMA submission, upon which we base the activities specified in the BARDA contract. As a reminder, that five-year contract provides up to $185 million to fund development and approval of INTERCEPT red cells in the U.S and today Cerus has already been allocated funding of approximately $45 million. Now that we have better clarity on our additional Phase 3 trial requirements, we can work with BARDA to make additional funds available. Now I will turn the call over to Kevin for our financial results.

Thank you, Carol, and good afternoon, everyone. This afternoon we reported Q4 product revenue of $10.1 million compared to $9.7 million for the same period last year. Full-year 2016 product revenue was $37.2 million, up approximately 10% from the prior year and within the range of our guidance of $37 million to $40 million. As contemplated in our guidance, year-over-year product revenue growth was driven primarily by expanded use in the U.S. as more blood centers begin to implement and rollout INTERCEPT over the course of 2016. As we’ve indicated earlier, we've seen recent acceleration in the pace of U.S illuminator installations with a record number recurring in Q4, helping to shape our 2017 guidance and kit growth projections. Accordingly in 2017, we expect U.S sales to shift away from illuminator placements and begin to be driven primarily by steadily growing disposable kit sales as the year progresses. With the timing of the final FDA bacterial safety guidance still uncertain. We’ve not assumed any significant 2017 revenue impact in our baseline U.S sales estimates. Within the expected 12-month implementation period for the guidance. We believe the market impact were likely be strongest in the latter half of that implementation period. Therefore, the expected impact from the final guidance document may fall into 2018, even if it is issued this year. Nevertheless our baseline U.S product revenue estimate assumes that kit volumes were more than triple in 2017 in comparison to last year. Outside of the U.S., we also expect increasing product revenue from our core European, Middle Eastern and African or EMEA markets. In a number of these markets, we've weathered headwinds over the past several years, which dampened the impact of new and expanding markets. We now expect these markets will stabilize and contribute to year-over-year growth. We are also factoring in some contribution from France and South Africa, but not the full potential impact should those markets move toward a 100% INTERCEPT platelet adoption. Finally, we expect modest product revenue contribution from our Asia and Latin American markets as we continue to develop our distributor network in these regions and establish a base for growth in outlying years. As a result of these key assumptions, we are providing 2017 product revenue guidance of $45 million to 50 million, representing 21% to 34% revenue growth year-over-year. This growth is expected to be fairly balanced with contributions from both the U.S and EMEA markets. As catalysts like the FDA guidance for major international market conclusions become clear, we expect to provide guidance updates as appropriate. As a final note, on 2017 product revenue, we historically do see some seasonality in our sales patterns and typically anticipate a softer Q1 as a result. We also expect to see lower Q1 reported revenue from the U.S due to the significant number of illuminator placements in Q4. Therefore, we expect Q1 global product revenue to be approximately flat year-over-year. As we move further away from year-end 2016, we expect U.S disposable kit sales to continue building up team as those 2016 device placements convert into routine use and drive disposable kit sales. I'll now move on to other Q4 and full-year 2016 results. Gross margins for the fourth-quarter and full-year of 2016 were 45% compared to 36% in Q4 of the prior-year and 31% for the full-year of 2015. Throughout 2016 we saw consistently higher margins due to the favorable impact of our current disposable kit manufacturing agreement with Fresenius Kabi, which went into effect in late 2015. In addition, we made meaningful improvements in inventory management compared to the prior-year, helping to lower losses and period charges. As we move forward, we continue to expect stability in our 2017 margins, with expected longer term margin expansion as increasing kit volumes lower our per unit disposable kit costs. In addition, as U.S sales become a larger proportion of our overall kit volume, we’re likely to see margin expansion due to heavy U.S reliance on the dual storage kit which has higher margins than the single-dose and plasma kits that historically drove U.S -- ex-US sales. Turning now to operating expenses. Total operating expenses for Q4 were $21.5 million, up from $18.5 million during Q4 of the prior-year. Total operating expenses for 2016 were $80.4 million compared to $71.8 million for 2015. The increase in operating expenses was partially driven by SG&A costs incurred in support of our U.S commercialization efforts. In addition, research and development costs increased as a result of activities under our BARDA agreement, preparations for the plant CE Mark submission for our red blood cell system and U.S label claim expansion activities. Net losses for the quarter were $13.5 million or $0.13 per diluted share compared to net losses of $14.8 million or $0.15 per diluted share in Q4 of 2015. For the year, net losses were $62.9 million or $0.62 per diluted share compared to $55.9 million or $0.61 per diluted share in the prior-year. Now looking at the balance sheet. We ended 2016 with cash and short-term investments of more than $71 million. Our average operating burn of approximately $13 million per quarter is consistent with the guidance we provided for 2016. And now I will turn the call back over to Obi for concluding remarks.

Thanks, Kevin. Just two months into 2017 we're already seeing the impact of the mini illuminators installed in the U.S last year. Often on a daily basis, the Cerus deployment team has been [indiscernible] internal announcements of new blood centers going live, along with pictures of the blood center staff producing and distributing their first INTERCEPT units. It is a great feeling to absorb their proud smiles demonstrating confidence that they are doing everything in their power to ensure patient access to safe blood. In the last week along, we’ve multiple large academic teaching hospitals and another Red Cross site go live, which provide the strong sense of inevitable transformation of blood safety in the U.S. The [indiscernible] increase in hospital demand for INTERCEPT platelets and the specter of the finalized FDA guidance document, the challenge out of that is just one of the INTERCEPT deployment and hospital education. As opposed to execution on new contracts, as blood center scale their operations to increase the production of INTERCEPT platelets, we have found that fulfillment of hospital demand is closely coordinated because the strong desire by hospitals to convert to 100% INTERCEPT and the blood center is concerned about having sufficient supply to meet their obligations. We are working through these issues as blood center scale up their INTERCEPT production, but are confident in our teams ability to support this transition. Alongside the U.S growth, we're witnessing the culmination of many years of effort in France and South Africa, and the influence that our multiyear Swiss and Belgium experiences is having our national transfusion services. The significance of these organizations potentially taking on INTERCEPT at a 100% cannot be underestimated both from their potential contributions to our top line sales, but also in creating a new de facto blood safety standards for other EU member states. To complete the INTERCEPT portfolio and enable the full potential for pathogen activation to safeguard the blood supply against future transfusion transmitted threats the BARDA funding in mid 2016 has dramatically accelerated our INTERCEPT red cell development efforts. Now that we’ve clarity on the scope of the clinical studies required for the PMA submission with the FDA, we can begin to anticipate our future launch in the U.S and while we’ve some additional work to do to release the commercial production lots for the CE Mark submission, the anticipated launch of INTERCEPT red cells in Europe is a significant focus of the Cerus team and represents a key milestone. We expect this year will be full of inflection points from meaningful revenue growth and key customer conversions to new product regulatory submissions and label claim approvals. A particular note is the most gratifying seeing the vast majority of blood centers in California, our home state begin the process of rolling INTERCEPT platelets out to the key academic medical institutions in that -- in the state. In addition, observing some of the larger pediatric hospitals prioritize the implementation of INTERCEPT platelets has been an important validation of our mission. In 2016, we saw the first incorporation of pathogen reduction into FDA guidance documents for blood safety and we anticipate that 2017 will be the year in which blood safety in the U.S and overseas accelerated transformation, transitioning from a reactive to a proactive model with increasing reliance on pathogen reduction methods. We believe that INTERCEPT is well-positioned to continue its market leadership. I'll now hand the call back over to the operator for questions.

Thank you. [Operator Instructions] The first question is from Bryan Brokmeier of Cantor Fitzgerald. Your line is open.

Hi, good afternoon. So, given the -- for the comments you made earlier in the prepared remarks and also at -- just now at the end Obi, certain hospitals are now ordering the max they can obtain beyond the BLA approvals. Can you talk about what other efforts here, you’re more specifically making to increase capacity in those areas?

Well, the BLA efforts are really key, certainly for some of the larger blood centers like the American Red Cross, they’ve taken on INTERCEPT. Their ability to supply excess platelets that they produce of anyone site and certain sites are certainly net exporters is a function of those -- their initial BLA approval and the subsequent CBE30s which allows the rest of their network to ship across state lines. So I think of all things that will have an impact, the BLAs from various large blood centers will probably have the biggest impact. In addition to that we’re obviously working with blood centers to optimize their production and it's just something that we're working on a daily basis and certain blood centers have the ability. We’ve seen in the last couple of weeks with some of these large teaching hospitals I mentioned are excess -- in excess of 70% of the production within the first couple of weeks of starting. So, it really is dependent upon each sort of unique operational considerations at each blood center.

And you previously said that this year will be about kit utilization in the United States from the focus in '16 on placement sales. Do you expect interim placement in the U.S to grow year-over-year in '17 or have most centers already adopted the system, so now it's really entirely about that utilization?

We will see some additional placements, because obviously it hasn’t -- we were not the complete market saturated, but I think 125 illuminators place in the U.S. And so a lot of that will be just transition into routine use.

Okay. And then just lastly, the triple - can you provide us with an update on the triple dose development rollout timeline? Thank you.

Yes, so we actually just received approval in Europe with its triple dose set. The U.S., we are still working to get that submitted in the second half of this year. I would expect its approval in sometime in 2018. So I think that the nice thing is we’ve a lot of operational experience coming out of the European launch. But obviously it's an important consideration for certain blood center customers in the U.S given their reliance on triples. So that varies from blood center to blood center, but certain blood centers really are looking forward to it in the U.S.

Okay, thank you.

Yes, thanks, Bryan,.

Thank you. The next question is from Thomas Yip of FBR & Co. Your line is open.

Hello, everyone. Thank you very much for taking my questions and I was very good to see the INTERCEPT continues to grow in the U.S and global markets as well. So my first question pertains to the U.S blood -- could U.S red blood cell program. If math is correct, that the entire Phase 3 program spending three Phase 3 trials will include something 11, 50 patients [indiscernible] patient in total?

No, I think at least to me, I can turf this over to Carol, but you roughly were talking about 400 patient study in cardiovascular surgery patients. I guess, I’m little lost on the number so, as the number of patients that are receiving INTERCEPT red cells or the total number of patients in the trial.

I’m referring to a total number of patients across [indiscernible] So. I guess …

[Indiscernible].

… so that includes a K1 [ph] chronic or together.

And the REDIS study which is sort of the open label in Puerto Rico and other southern states, yes.

Right. And so when should we expect the sickle cell dosage you start?

Well, so right now that the first study that will be hopefully initiating this week is the REDIS study, and then the other studies are likely to start in 2018. And the overall timeline is roughly consistent with what we’ve discussed with BARDA. So we anticipate sort of a completion of the Phase 3 studies in sort of the 2019, 2020 timeframe and a submission around that time.

That’s all right. So, I just want to double check, so regarding the revenue guidance for this year 2017, dad does not include BARDA revenue, am I correct?

That is product revenue guidance. Yes, we were not guiding to BARDA.

Okay. And also heard on the prepared remarks that so far $45 million in BARDA contract has already been allocated, -- I’m assuming that us for the Phase 3 valid study and also I guess other activities as well just for this year?

That’s -- so you’re right in the scope of what that’s funding. So it's for REDIS and other studies around that. And then some preparatory activities for future work, but expands the course of dose studies, so it’s not just for this year.

Okay.

We’ve to secure incremental BARDA funding for the other states as we talked about that now have -- now that we’ve clarity on the scope of those studies with the FDA.

Right. That sounds good. Okay, thanks. Thank you so much for taking my questions and for clarifying and forth to you attracting INTERCEPT's progress this year?

Thanks, Thomas.

Thank you. And our final question comes from Emily Stent of Robert W. Baird. Your line is open.

Hey, guys. Thanks for taking my question. First one from me is, again the Canadian market is there any update as to when you would expect platelet approval there?

You know we’re still back and forth of [indiscernible] questions, I mean, I think you recall that was sort of an extended review process for the plasma approval that we received last year. So I hope that there are some leverage that we got given the similarity of the submissions. But I don't really have an update for you on platelets in Canada at the time -- this time.

Okay. Sounds good. And then, turning towards BLA, how many submissions do you think you will have by year end and can you talk about how once the customer has the BLA, [indiscernible] pressure other blood center then at that competitive dynamics?

Yes, thanks, Emily. So I’m not really sure exactly how many BLAs will have filed, because ultimately it's at the discretion of the blood centers. And obviously they only really consider that as their net exporter and looking to either maintain their current business or look to expand their business. And I think for the larger blood centers that clearly ship products across deadlines, it's really a single BLA. So I’m not sure the total number of BLAs is that relevant given that the Red Cross will have the single BLA for example, but you see CD30s for all their roll production sites. And that's true for other large net exporters in the U.S. With regard to the competitive dynamic between blood centers, obviously we talked a lot on the call and the prepared remarks about the hospital demand and there is a number of regional markets where there are a lot of player [ph] users and to date there is not -- sufficient supplier, and so ultimately we do think that if the current blood center hospital relationships are not working then the hospitals will need to find other alternatives to source INTERCEPT platelets. And it will create somewhat of an interesting dynamic, dependenting upon any kind of delay and the BLAs for the next exporters.

Okay, great. Thanks. And then last one for me, it's just a little bit more technical. If there are big FX, FX within the quarter?

No, there really wasn’t actually FX for the year has been pretty stable. So not a huge impact.

Okay. That’s all for me. Thank you very much.

Okay. Thank you.

Thank you. And at this time, I’d like to turn the call back over to Obi Greenman for closing remarks.

Thank you all for joining us today and for your interest in Cerus. We look forward to updating you on our Q1 call early May. Thanks very much.