Cerus Corporation (CERS) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Cerus' Corporation First Quarter 2017 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 call is being recorded. I would now like to introduce your host for today’s conference Ms. Lainie Corten, Vice President of Investor Relations. Ma’am you may 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; Carol Moore, our Senior Vice President of Regulatory Affairs & Quality and Richard Benjamin, our Chief Medical Officer. Cerus issued a press release today announcing our financial results for the first quarter and ended March 31, 2017 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 2017 product revenue guidance, gross margins and operating expenses, future product sales mix 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. These risks and uncertainties are identified and described in today's press release and under Risk Factors in our Form 10-Q for the year ended March 31, 2017 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 website and will not be updated during that time. On today’s call we'll begin with opening remarks from Obi, followed by Q1 financial results from Kevin and then Obi will conclude with final remarks. And now it’s my pleasure to introduce Obi Greenman, Cerus's President and Chief Executive Officer.

Thank you, Lainie. Earlier today we released information on our Q1 2017 financial results. I'm encouraged by the meaningful growth drivers that are on the horizon both in our EMEA markets and here in the U.S. While we face a few near-term headwinds in helping us blood centers ramp up their production. The need for safe blood is more urgent than ever. Our efforts to date both commercially and on the development front position us well to realize our important mission to save drive the blood supply and ensure its availability to patients. To that end, I would like to provide some updates on our key commercial markets in 2017 and why we remain enthusiastic about our growth prospects. In the U.S., we are making good progress with our blood centers partners to initiate routine production of INTERCEPT platelets and also to expand production for blood centers which have already begun to supply their hospitals. Year-on-year U.S. kit sales nearly tripled for Q1. A number of major producers and premier institutions have begun distributing INTERCEPT platelets since January 1st, including Gulf Coast Regional Blood Center, the Mayo Foundation, New York Blood Center and several more regional American Red Cross production sites. The American Red Cross is now producing INTERCEPT platelets at 9 manufacturing sites and expects to add at least one more to its system before the end of Q2. At this point in the national rollout, the Red Cross is focused on increasing production capacity of INTERCEPT platelets in these 10 sites to better meet the fulfilment obligations to its hospital customers. In recent surveys, Red Cross customers reported strong interest in receiving pathogen reduced platelets. Market demand for INTERCEPT is growing. We are partnering with the Red Cross centers to increase product volumes and prepare hospital customers as they transition to full routine use of INTERCEPT platelets. As Red Cross expands to new production sites, it can leverage the experience from those sites already implemented and in the future a Red Cross BLA is expected to aid its national distribution network via export between states. As a final US related update, we are pleased to note that Cerus and collaborators have submitted 10 abstracts for the AABB Conference taking place October 7th to 10th in San Diego. The AABB conference is the largest blood banking conference of the year globally and draw a significant international participation in addition to the thousands of US attendees. This year the INTERCEPT platelet abstracts cover the especially broad range, including platelets, plasma, red blood cells and O-blood and topics as diverse as emerging pathogens treatment of triple dose collections and the economics of pathogen reduction. For the ongoing development activities for INTERCEPT – the INTERCEPT red blood cell program, it’s great to see that system [ph] an increasing use at blood center supporting our clinical trials and the high quality of those red cell components when manufactured. Turning now to our international markets. We are active negotiation with a French National Transfusion Service, the EFS on new contracts for both the potential purchase of additional illuminators, as well significantly increase kit purchase volumes that would allow expansion of INTERCEPT platelet production beyond historical levels. While we have been operating under existing agreements with EFS last entered into in 2015, the new contracts structure under discussion contemplates annual purchase levels, the top range of which would establish INTERCEPT as a nationwide standard of care. These new contracts could be signed as early as this quarter and we will be able to provide further detail at that point. We are also awaiting a tender decision in South Africa where we believe INTERCEPT is well positioned to be the technology of choice to the South African National Blood Service move forward with pathogen reduction later this year. Both of these opportunities potentially represent meaningful growth platforms for our EMEA region and we have previously expected that both of these new INTERCEPT contracts would be signed now. So we are no less confident about capturing this new business in the near to medium term, these delays do impact the assumptions upon which are full year 2017 product revenue guidance was based. Factoring [ph] in later start dates in these markets, and considering the ongoing uncertainty and timing for a final FDA Bacterial Safety guidance document in the US, we believe it is prudent to adjust our 2017 product revenue guidance to a new range of $43 million to $48 million. However, I want to state clearly, that our growth prospects and customer interest in INTERCEPT remain strong. Governments, blood centers, hospitals, physicians and most importantly patients all agree that safe blood is essential. While timing of key events may shift from time to time, the longer view shows that adoption of pathogen activation is growing and is becoming a core element in national regulatory policies to ensure blood safety. Now, I will turn the call over to Kevin for our financial results.

Thank you, Obi. And good afternoon, everyone. This afternoon we reported Q1 product revenue of $7 billion. Q1, 2017 represented the first quarter of U.S. sales driven primarily from disposable kits, rather than illuminator placements. As the 2016 illuminator placements mature, we expect disposable kit consumption to continue to expand. Ex-U.S, Q1 product revenue was down and is typically lower in Q4, as a result of the timing of purchases for international accounts. This was contemplated in our remarks in the last call and in our guidance. With that said, this year French kit orders were unusually low in Q1, which we believe may reflect the desire to defer larger orders, while the new EFS contracts are under discussion. The cadence of our discussions around these contracts is encouraging and we believe that we should have clarity in the mid year timeframe. Now turning from revenue to other Q1 results, gross margins for the first quarter were 47% compared to the 44% in the first quarter of the prior year. The year-over-year increase was partially due to the positive impact from selling a larger proportion of higher margin platelet kits relative to plasma kits. In addition, we've realized manufacturing and inventory management efficiencies since Q1 2016. These continued margin improvements are evidence of our focus on stabilizing and growing gross margins and we expect margins will remain in the mid 40s through year end. Turning now to operating expenses. Total operating expenses for Q1 were $22.8 million, compared to $18.7 million during Q1 of the prior year. The increase in operating expenses was partially driven by SG&A costs incurred in support of our U.S. commercialization efforts which we believe are necessary to support the expected increase in the INTERCEPT adoption. In addition, research and development costs increased as a result of activities under our BARDA agreement, preparations for the plan CE Mark submission for our red blood cell system and U.S. label claim expansion activities. Looking forward, we expect R&D costs to increase from Q1 levels as a result of conducting the Rattus [ph] clinical trial. Rattus trial expenses are funded by BARDA and reflected as government contract revenue in our statement of operations. Operating losses during the first quarter of 2017 were $18.1 million compared to $15.3 million for the first quarter of 2016. Net loss for the first quarter of 2017 was $18.6 million or $0.18 per diluted share compared to a net loss of $16.9 million or $0.17 per diluted share for the first quarter of 2016. For the first quarter of 2017, we ended with cash and short term investments of $53.8 million. And now I'll turn the call back over to Obi for concluding remarks.

Thank you, Kevin. Before I conclude, a quick update on the INTERCEPT red blood cell development program. Our development work continues in order to quantify commercial lots and clarify the potential timing of the CE Mark submission. As we communicated in March, we will be in a better position to provide an update on the expected CE Mark timing on our Q2 call in early August. We're making good progress on the commercial lot release activities that will provide us the clarity we need to update you all on the expected CE Mark filing timing on that call. In our U.S. developed program BARDA funded activities were also progressing, with our Rattus trial open for enrolment and our clinical team incorporating the FDA feedback into our recipe trial protocol. Our 2017 development deliverables for red cells are tracking as expected across both geographies. In closing we are making progress in our U.S. and international markets and we believe we are well-positioned this year to deliver significant growth in the use of INTERCEPT products. This quarter alone we were really pleased to see many new hospitals in the U.S. provide INTERCEPT treated blood products to their patients. It is clear to us that our decision to invest in the medical science liaison and deployment teams was the right one and we have built out the right capabilities to support our blood center partners. We're also encouraged by the cadence of contract discussions in major markets, despite timing delays. INTERCEPT is increasingly seen as a foundational strategy for the provision of safe blood and with the potential for up to $185 million from our BARDA contract, we have access to the funds necessary to develop our INTERCEPT red cell program, thereby rounding out the INTERCEPT portfolio and further supporting our market leadership. Our mission is clear and I'm excited about what lies ahead and I look forward to updating you on our progress in future calls. I’ll now hand the call back over to the operator for questions.

[Operator Instructions] And our first question comes from Bryan Brokmeier with Cantor Fitzgerald. Your line is now open.

Hi, good afternoon. Last quarter you indicated that you had instituted a team of medical liaisons and hostile implementation teams here in the U.S. to support the hospital adoption. Are you seeing any early signs that that demand is going to start to pick up?

Thanks, Bryan. So we actually start building that team a couple of years ago, but we – I think what we alluded to on the last call was that we just expanded it. And so I think what we've found is that it's really critical for our blood centers to have the support from Cerus to be able to hand off the platelets that they're producing into their hospital customers and educate them. So that's certainly what we're seeing and we see it on a daily basis, it's nice to get you know photographs from blood centers, but also hospitals that are going live within a sub treated products. And so it's a very frequent event, and I think you know the team is appropriately full and you know we're looking forward to the execution now going throughout the rest of the year.

Okay. And you talked during your prepared remarks about the American Red Cross and they are now nine centers are up and running and they're planning to add another one in the second quarter. You know, you've had pretty good adoption by other set blood centers as well. And I was wondering if you could talk about the demand from hospitals and how that - how well that is matching up with the availability of platelets from the Red Cross and others and what you're doing in order to try and better match and support the demand from hospitals that’s out there?

Yes. So the Red Cross represents about 40% of the platelets supply in the United States. And so getting to 10 centers in Q2 we're at 9 now, but its all part of the plan that we have laid out with the Red Cross. I think we're still seeing a situation in which we have more demand than the Red Cross can meet today. And so we're working closely with the Red Cross and how do we expand their capacity. And I think that the Red Cross is a good proxy for what we're seeing at other sites and other sites - other blood centers you know, maybe taking a more measured approach where you know, there's a large blood service like [indiscernible] we'll deploy at two to three sites, see what the demand looks like and then go from there. And then obviously you know, the overarching consideration here is you know what's the timing of the FDA guidance document for addressing bacterial contamination and platelets and what the implications are.

Okay. And it also sounds as though some of the weakness in the quarter was at least in part due to the large orders by French centers they didn't receive. Could we see that start to pick up in the second quarter or how are you looking at the timing of that?

Well, I think at the very least we'd expect them to normalize. A lot of our guys both high and low end is predicated on having the French contract in hand, which we're encouraged by the cadence of discussions. But you know, the timing of which will drive a lot of the guidance. So you know, in the near term we expect that sales will normalize and longer term we expect that the new contracts will have a significant impact on our growth.

Okay. Thank you very much.

Thanks, Bryan.

Our next question comes from Josh Jennings with Cowen and Company. Your line is now open.

Hi, good afternoon. Thanks for taking the question. I wanted to follow up on France. Is the election there delaying the timing by any means? And could the ultimate result of election in terms of who takes seat, is there any risk in terms of leadership of the FS potentially changing?

I think that certainly looks like McCraw [ph] is in the lead right now. And I think if he is elected then I think you'll probably see a status quo amongst a lot of the different departments there and the fact, but we don't know that for sure. I think that what we've seen to date though is that they're perceived, the cadence of the discussions are sort of independent of the election process. And I think we're just sort of working through the details of what they're looking to do. And as I alluded to in the prepared remarks the range that we're discussing does anticipate for adoption at the high end.

Great. And just a follow up with just on a low end potential, thinking in your K you guys called out $3.5 million in revenue from France in ‘16 off a much higher number in 2015. Is still low wind, could you just help us understand what the low end of the range could be?

So 2000 until 2016 was a year where the French for their plasma business were really considering their strategic options with the potential introduction of Octapharma. So you saw you know quite a few sales for plasma and platelets in the first a half, I’d say half to three quarters of 2016 and then in Q4 the plasma business for us has really taken a backseat to their decision on safeguarding the blood supply for platelets. And so you know, our belief is that in the near term we would see stabilization from Alsace and overseas protectorates and then with the new contract in hand they would roll it out to potentially a third to half of their market and then it is a long-term contract structure that we're discussing and over the course of that long-term we believe that their intention would be to standardize on INTERCEPT.

Okay. Thanks for that. And just wanted to ask about any updates in terms your thoughts on timing for the FDAs platelet bacterial safety guidance. There were some recent comments that were submitted, updated comments from AABB and American Red Cross, American blood centers and they spoke about a number of things, but one of the things that they are GFP [ph] to do is to consider as an urgent priority, expanding what they consider a stringent guard bands of platelet concentration and volume boundaries which for collections, but also expedite the approval pathway for triple units, PR collections and then also accelerate BLA approvals. Any thoughts on the potential for those things to come about, and if you could give us an update just in terms of where you are in terms of the pathway for approval for triple unit pathogen reduction collection kits, that would be great.

Thanks, Josh. I mean, we certainly take the recent letters to mean that blood centers in hospitals believe the document may be coming out even faster than we anticipated. And I think that you know, obviously they're looking at availability in that context and how they can comply with the guidance. And so some of the language in those letters related to extending the compliance period from 12 to 18 months. I think we were encouraging to see in those letters the request to expedite certain label claim extensions that we're pursuing, like the triple dose kit. And right now our plans are to get that in 2018 such that blood centers would have it available during the potential compliance period with a final guidance document. Right now we're sort of seeing that it would be a 180 day review period once we submitted for the triple dose set. I think it's also important to note that the triple does play that is approved in Europe. And so what we're doing is just sort of trying to meet the FDA requirements for this new kit that has higher both volume and platelet dose ranges for treating collections and allows three units to be produced from a single platelet collection.

Great. And then just one last question, is just on the core international business, excluding any contributions from up to date agreement with France or South Africa tender. What are your assumptions and the updated guidance for that core international business? Is that - is there growth there in 2017? Thanks a lot for taking the questions.

There is. Yeah, I mean, the French contract and the French are important customers for us no doubt. But there are also growths in the other areas in the core markets. You know, we had mentioned I think on the last call the CIS territories, the Middle East, perhaps in southern Europe as well, all contributing to growth and we believe those are intact.

Great. Thank you.

Thanks, Josh.

[Operator Instructions] And our next question comes from Catherine Schulte with Robert W. Baird. Your line is now open.

Hey, guys. Thanks for the questions. Can you elaborate on CMS's decision to issue the new Q codes for pathogen reduction and bacterial testing separately? Is that just reflecting or these are two different products or do you think this is a step towards being able to implement a final guidance?

I think it's largely a function of function of - that there are two different products with two clearly different specifications. So you know, co-mingling that into a single P code didn't make sense and also potentially impacted the hospital's ability to get reimbursed appropriately for blood components. And so I think we had a lot of advocacy coming from the various groups in transfusion medicine to support a separation of that code. So the P9072 code is an annual code designation. And so they issued two new codes Q9988 was for the INTERCEPT product and what we anticipate will happen at the end of the year because P codes can't be changed within a year is that the INTERCEPT product would revert back over to the P9072 code.

Got it. And then realize it's still early on and some hospitals are going to be waiting for that final guidance. But have you seen hospitals already choosing to do point of release testing and then in those cases what makes them opt for that versus INTERCEPT?

Yes, we have seen a few hospitals do that. And I think the end of the day you know there's obviously, there are choices. I mean, there is some desire by certain hospitals to have a longer shelf life. But I think what was really interesting that we took note of was the – in the AHA letter was the complexity associated with doing point of issue testing both from a licensing and labelling standpoint. And the significant impact that it would have on the consignment model that blood centers have with their hospital customers in many cases. And what I mean by that is that essentially once the product is distributed to a hospital it can be taken back by the blood center once it reaches a certain shelf life and then the complexity is sort of managing the labelling of that product once you hit a certain shelf life really exacerbates inventory management concerns for blood centers.

Okay, great. Thank you.

At the time, I'm showing no further questions. I would like to turn the call back over to Obi Greenman for in closing remarks.