Cerus Corporation (CERS) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cerus Corp Q2 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Lainie Corten, Investor Relations for Cerus Corp. 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; Richard Benjamin, our Chief Medical Officer; Kevin Green, Cerus' Chief Financial Officer; and Carol Moore, our Senior Vice President of Regulatory Affairs and Quality. Cerus issued a press release today announcing our financial results for the second quarter ended June 30, 2017, 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'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, operating expenses, cash burn and sufficiency of cash, future product sales mix and volume, future regulatory-related events, clinical trials and other product development activities including with respect to cryoprecipitate, CMC activities with respect to our red cell program, our commercial goals and initiatives including new contracts, customer activity under existing contracts 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 quarter ended June 30, 2017, that we expect to file shortly. We undertake no duty or obligation to update any forward-looking statements that 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 and a summary of the quarter from Obi, followed by a US red cell update from Richard. Then we'll have Q2 financial results from Kevin and finally Obi will conclude with final remarks. And now it's my pleasure to introduce Obi Greenman, Cerus' President and Chief Executive Officer.

Thank you, Lainie. Earlier this week we announced two new contracts with France's National Blood Service, the EFS. Collectively, these contracts will allow the EFS to purchase the disposable kits and Illuminators necessary to make INTERCEPT platelets the standard of care across all regions in France. The EFS conversion is motivated by a January Ministry of Health decision that the INTERCEPT platelet system should be deployed for the control of bacterial infections transmitted by transfusion, consistent with a December, 2016 recommendation by France's Regulatory Authority, ANSM. Our deployment and technical services teams will be working with the EFS regions which require additional Illuminator installations and training and we are ramping up kit production to ensure sufficient supply is available as these regions rollout INTERCEPT. With over 300,000 platelet units produced annually in France, these new contracts could allow us to substantially expand our business beyond our current approximate 10% share of the French market. We believe the EFS decision represents a key inflection point in the broader movement to incorporate pathogen inactivation into national blood safety policy goals. In the US, The American Red Cross is now producing INTERCEPT platelets at 10 of their manufacturing sites. We are working closely with their teams to support introduction of pathogen reduction to new hospitals as well as evaluating methods to increase their production of INTERCEPT which has been increasing at each site over time, but not as quickly as either organization would like. The Red Cross sees pathogen reduction as an important strategic initiative and is committed to rolling it out across their nationwide distribution network. It's encouraging to report that we have not seen any supply shortages from Fresenius Kabi's platelet additive solution which is used by The American Red Cross and a number of other US blood centers. Platelet additive solution is currently required in order to produce INTERCEPT platelets on Fresenius Kabi's Amicus platform, and you will recall that late May we reduced our annual revenue guidance in anticipation of possible interruptions in supply while the FDA reviewed the Fresenius application for changes to the product storage container. Overall in the US market, we are now live at 25 blood centers with 23 more in the process of installation and training. While we have seen some smaller centers ramp up production quickly to high levels, many of the larger centers remain cautious about their pace of integrating INTERCEPT into their daily platelet collection and processing. While many of the larger blood centers are encouraged to see interest from their key hospital accounts, they are also concerned about how rapidly and consistently they can meet significant INTERCEPT demand. In some cases, they are also waiting for their BLA approvals in order to access key hospital accounts. We expect to see the first INTERCEPT BLAs approved this fall. While we have been frustrated by the pace of US adoption, as well as the recently announced delay in the FDA's timing for a final bacterial safety guidance document, our US business is growing. Q2 2017 kit sales in the US have more than doubled compared to Q2 2016. On the production side, we believe blood centers can produce substantially more INTERCEPT platelets and we are systematically educating our customer base about the options available to them, including the possibility of splitting triple collections into single and/or double doses that could be treated with our existing FDA-approved INTERCEPT kits. On the hospital demand side, our value proposition to hospitals and transfusing physicians is not dependent solely upon bacterial inactivation and the FDA guidance, but rather on the broad spectrum of pathogens we inactivate and the importance of addressing transfused and transmitted disease risk for all patients. Demand for the INTERCEPT platelets continues to grow as we educate hospitals on the benefits conferred by our system, including early release of INTERCEPT platelets relative to conventional products allowing for a longer effective shelf life. Moving onto our development programs, cryoprecipitate is a product that we have been evaluating for some time given its critical role in the treatment of trauma and maternal hemorrhage. We are now officially adding INTERCEPT Cryo to our development pipeline following the outcome of two important recent events. First, based upon a discussion with the FDA, we have determined that INTERCEPT Cryo can be approved as an extension to our INTERCEPT plasma label, which is the regulatory pathway that we desired since it streamlines our application considerably. Second, we have decided to pursue a new business model for this product in which we plan to engage a select group of blood centers as manufacturing partners and promote and sell the product directly to hospitals. As we announced last week, we will be working with the Central California Blood Center as our first manufacturing site. We plan to seek an extended post-thaw shelf life of up to five days, which would allow for immediate availability to treat severe hemorrhage and also reduce product wastage. We believe that INTERCEPT Cryo is a market opportunity larger than that of INTERCEPT platelets in the United States. Turning now to INTERCEPT red cells, I will provide an update on our work toward a planned European CE Mark submission and an expanded commercial manufacturing scale up funded by BARDA. Over the past six months, we have brought assay development in-house to work on optimizing the current HPLC based test method to characterize the commercial lots in preparation for the CE Mark submission. After extensive analysis, we believe a more state of the art process using UPLC is necessary to provide the greater specificity and sensitivity required for commercial lot release in comparison to the previous qualification of lots for limited use in clinical trials. In parallel, we have done extensive work to profile critical product characteristics to understand their impact on manufacturing quality, which gives us confidence that we may also now be able to refine our commercial specifications for lot release. Given the planned changes to the testing process and the ability to qualify our commercial lots using a revised commercial specification, we now expect the CE Mark submission in the second half of 2018. While we would have liked to have submitted the CE Mark by the end of the year, the revised timeline allows us to include clinical results from our Phase III SPARK study in thalassemia patients as part of the submission. We believe this will strengthen the overall regulatory dossier, especially for future in-country regulatory submissions required in addition to CE Mark, like in France and in Germany. For ITNERCEPT red cells in the US, we are rapidly expanding the scope of ongoing development activities with support from the BARDA funding. Richard will speak to our clinical activities in a moment, but the approximately $88 million in committed funds cover a broad range of other work, including invitro function and pathogen activation studies to establish compatibility of the treatment process with different red cell additive solutions used in the US market. There is also synergy with many of the activities that we are performing to qualify commercial lots for the CE Mark submission, since the BARDA contract includes work toward future generations of the product configuration, which was already planned to include the UPLC method development. Now, I will turn the call over to Richard to provide an update on the US red cell clinical program.

Thank you, Obi. Over the past quarter, we've made considerable progress towards finalizing our US Phase III acute anemia trial protocol, as well as clarifying when we will be able to begin enrolling patients. This study, named ReCePI, is one of the three Phase III studies we expect to perform for planned US licensure of INTERCEPT red cells. The other two are the RedeS study currently ongoing in Puerto Rico with enrollment open in three hospitals, and also a planned study in chronic anemia patients. On our Q4 call in March, we reported that the FDA had asked us to gather safety data from the first 150 patients in the test arm of RedeS and to review the findings with them prior to initiating either the ReCePI or chronic anemia studies. I am pleased to announce that this requirement has been waived. It is no longer a gating factor for moving forward on our other red cell trials. In another significant step forward for ReCePI, we have recently reached consensus with the FDA on the primary endpoint for this study which will be conducted in complex cardiovascular surgery patients. There are no direct measures of red cell transfusion efficacy for treatment of acute anemia and therefore clinical trials in this field rely on surrogate endpoints. Over the past several months, we've discussed with the FDA various assessments of kidney injury as a measure of tissue hypoxia caused by anemia and agree with the agency's suggestion to use a defined increase in serum creatinine levels as the primary endpoint in our study. We are incorporating this endpoint into our protocol and expect to receive FDA approval of the protocol by year's end. ReCePI is a randomized controlled, double-blinded, noninferiority study that we plan to perform at 10 to 12 clinical sites supported with test and control red cell products produced at up to four participating blood centers. We currently estimate a study size of approximately 600 patients. We anticipate that it will take approximately six months to start the study following protocol approval, putting an expected enrollment of our first patient in mid-2018. Now, I'll turn the call over to Kevin for our financial results.

Thank you, Richard. This afternoon we reported Q2 product revenue of $9.5 million, up 3% from prior year levels. The increase in product revenue for the quarter was primarily driven by year-over-year growth for US disposable kits as total US product revenue more than doubled. We expect US disposable kit sales to continue to ramp as the 2016 Illuminator placements are put into use. Ex-US, demand for INTERCEPT platelet kits was also up by approximately 5% offset by softer plasma kit sales when compared to Q2 of 2016. However, lower year-over-year foreign currency exchange rates, particularly the Euro, dampened the revenues as reported in US dollars. On a year-to-date basis, product revenue totaled $16.5 million, compared to $16.9 million in the prior year. Increases in platelet sales in the US, Middle East and France were offset by declines in plasma kits in Europe. Foreign currency exchange rates also contributed to the differential. As it relates to our 2017 product revenue guidance, given our year-to-date sales results and our outlook for the second half of the year, including the potential range of impact from our EFS agreement, we now project full year revenue in the range of $40 million to $46 million, compared to our previous guidance of $38 million to $46 million. We are bringing up the low end of the range as the impact from the platelet additive solution shortage was less disruptive than we had expected at the low end of our prior guidance. Now turning from revenue to other Q2 results, gross margins on product revenue were 54% compared to 46% in the same period the year prior. Gross margins in the quarter benefitted from a shift to higher margin platelet kits and from favorable manufacturing yields for certain components. Over the past year and a half, our efforts to manage our supply chain and improve manufacturing and inventory efficiencies has provided us with a platform for stable and growing margins. While we don't expect the same level of benefit from the favorable component yields we experienced this quarter, we do anticipate margins will be in the mid to high 40s through yearend. For the first half of the year, gross margins were 51% compared to 45% in the same period last year. Turning now to operating expenses, total operating expenses for Q2 were $23 million compared to $21 million during Q2 of the prior year. The increase was partially driven by SG&A costs incurred in support of our US commercialization efforts. In addition, R&D costs increased as a result of activities for continued expansion of our label claims in the US and increased activity surrounding our BARDA agreement. For the first six months of 2017, operating expenses totaled $45.9 million, compared to $39.7 million in the first six months of 2016. Looking forward, we anticipate SG&A expenses will remain stable and do not anticipate continued near term upward drift of those costs. US red cell R&D costs may increase as we move forward, but these expenses are reimbursed under the BARDA contract and reflected as government contract revenue in our statement of operations. Operating losses during the three and six months ended June 30, 2017 were $16.2 million and $34.3 million respectively, compared to $16.7 million and $32.1 million for the same respective periods of 2016. Net loss for the three and six months ended June 30, 2017 was $17.1 million and $35.7 million respectively, compared to $18.2 million and $35 million for the same respective periods of 2016. Net loss for the second quarter of 2017 was $0.16 per diluted share, compared to $0.18 per diluted share for the prior year. We ended Q2 with cash and short-term investments of approximately $51 million. As we announced yesterday, we subsequently amended our debt agreement with Oxford Finance to provide up to $40 million of non-dilutive capital with an 18 to 24 month interest-only period. With the anticipated contributions from the EFS contract, improving gross margins, the flexibility to fund the anticipated EFS and other commercial growth from our new debt facility, and our focus on controlling operating expenses and utilizing existing Cerus resources to execute under our BARDA contract, we expect operating burn to come down meaningfully. And with that, I'd like turn the call back over to Obi for concluding remarks.

Thank you, Kevin. I'd like to close by emphasizing the importance of the recent progress we have announced across multiple areas important to our business. We believe the EFS contract and intention to make INTERCEPT the French standard of care provide a line of sight to sustainable growth in the EMEA region over the next two years. We also see similar opportunities for growth in the US market, albeit off of a smaller base of current revenue. We are working with key blood center accounts, including the American Red Cross, to improve production capacity and expand the number of hospitals receiving INTERCEPT platelets and these efforts continue unabated, independent of the delay in the guidance document. Our red cell development program is moving forward in both the EMEA and the US and we've added INTERCEPT Cryo as new program in our development portfolio that we believe has the potential to drive significant revenue growth in the intermediate timeframe. Finally, we are instituting a disciplined approach to manage our cash burn while we work to deliver both revenue growth and development progress. I will now hand the call back over to the Operator for questions.

[Operator Instructions] And our first question comes from Drew Jones, Stephens Inc. Your line is open.

Thanks, good afternoon guys.

Hi Drew.

Hi Drew.

Thinking about red blood cells, is there any way that the new product release assay in Europe, is that going to have any impact at all on domestic trialing activity?

I'll turn that one over to Carol.

We don't believe so. We think that the assay is not relevant to the clinical assessment.

Okay. And then as far as France timing, it sounds like there was a little bit of deferral that pushed from 1Q into 2Q, but it sounds like we should kind of snowball from this point. Is that the right way to read that?

I think in general the contract anticipates routine use across all regions in France. And I think the way we're looking at this is just we're standing at the ready and prepared to help them implement as quickly as possible, both from a deployment standpoint, as well as a kit supply standpoint. But how quickly they roll it out really is not clear at this point in time. But I think we did reference in the prepared remarks the essential mandate coming from ANSM and also DGS which is their Ministry of Health. And so I think there is sort of this ongoing fluidity, but with a clear goal of getting them into 100% routine.

Last one from me, Kevin, you gave some good commentary around OpEx and cash burn. How much is contemplated in terms of spend for a cryo trial?

Thanks Drew. Well given that it's a TMA supplement; it's not a huge ticket development program. There will be certainly some invitro work that goes on, but not like a red cell Phase III clinical trial, so it's a very modest spend.

So it would likely offset maybe the delay as far as CE Mark? You can just slide cryo in for what was maybe designated for CE Mark submission?

We'll certainly be working on both of those activities in parallel, that's for sure.

Thanks guys.

Thanks Drew.

Thank you. And our next question comes from Catherine Schulte from Robert W. Baird. Your line is open.

Hi guys, thanks for the questions. I was wondering if you could walk us through the process for rolling out France a bit more thoroughly. How many incremental Illuminators do you think you'll need? And then for sites that already have Illuminators but aren't in routine use, what are the steps they need to go through to get up and running?

Sure, I'll take that one. So there's roughly 12 additional sites throughout France and we don't know exactly what their plan is site by site. But generally, each site has about two Illuminators. The contracts contemplate more than that, so if there is a need for additional Illuminators beyond that, then they certainly can purchase those. What's needed is the Illuminators which are ready for them, we have those on hand. And then deployment activities to get the devices installed and the personnel trained. And so we'll work to make sure that we can stand them up as quickly as they can operate. But as Obi mentioned, the contract does call for this to be the standard of care and we expect that to be the case over the initial two-year term.

Okay. For sites that have submitted BLAs, have you been working with them to get them in touch with hospitals who want INTERCEPT, but can't get it in their state, so that those hospital customers will be lined up and ready once the BLAs are approved?

It's a great question. So we are working very closely with the hospitals. We've added a team, basically three people to work on hospital implementation over the last 12 months. And that's basically just to manage the coding and billing and nurse in-servicing if you will. So there are sites for example in Massachusetts where there's currently no INTERCEPT production that are awaiting the BLAs to be able to start purchasing. And there are other states as well. So we are working very closely with the hospitals. With regard to your specific question around the BLAs, it's really once they - we worked with them in advance of their submitting their BLAs, but once they were submitted, we really haven't worked with them subsequently and we understand that they have received questions, a number of them have received questions from the FDA. And so that is progressing as we sort of expected. I don't know if Carol has anything else she'd like to add about the BLA process.

No, I think that it's a site-specific process, so the blood centers have responsibility for those BLA activities. Should they need some help, we certainly told them that we'd be happy to jump in and help them or provide information to the FDA or any kind of cross reference to our data. But they seem to be capable of handling it at this point.

Okay. And then just last one from me. You talked about managing cash burn. How low do you think that goes over the next couple of quarters?

So Catherine, I think it's really a function of topline revenue growth. Our goal is to take it from the $12.5 million to $15 million on average, which we guided to earlier this year, down over the next 12 to 18 months. And so we'll see where things shake out, but we believe that there's significant room.

Alright, great. Thank you.

Thanks Catherine.

Thank you. At this time we only have time for one more question and that question comes from Josh Jennings from Cowen. Your line is open.

Hi good afternoon, thank you for taking the questions. I was hoping to start with the US business. The concerns around the InterSol supply constraint potential. Did that have an impact in Q2? You guys still reported nice year-over-year growth for your disposable kits, but I was wondering, if the InterSol supply constraint issue hadn't popped up, would this business have done even better in 2Q?

I think it's hard to sort of gauge that. I mean it was certainly something that caused a real panic, for lack of a better word, by a number of customers. And at the same time, it was resolved, at least from the standpoint of having product available to be delivered even though the product is not approved. So I think just as far as the stutter step that essentially was involved, it was probably a month of angst, but it's sort of hard to determine what kind of impact that had on revenue in Q2. And I think we still continue to work to expand INTERCEPT production. I think we see strong demand coming from a number of hospitals and I think it's interesting. In Europe, we typically sort of see things as being a national standard of care. In the United States, it's sort of a hospital based standard of care. So a lot of the hospitals would like to have 100% fulfillment and they're not getting that yet. And so I think we're working obviously diligently on trying to stand up the supply for the major blood centers so that they can provide 100% of the platelet demand that they're seeing from their hospitals. But I think we'll see that over the coming quarters.

Great. Just in terms of the InterSol supply, should we be thinking of this issue as relatively completely resolved? I know Fresenius had their submission that's going to go through the review process, but how should we be thinking about that risk?

I think we're still not going to sort of believe that we're out of the woods completely until October when the product is officially licensed and the 180-day review is up. But to date we haven't seen any impact as I mentioned in the prepared remarks.

Great. If I could just ask about the FDA platelet bacterial safety guidance timeline, I mean is there, internally do you have any sense of what the FDA's drive is here just in terms of the path forward of issuing another draft before finalizing? Any thoughts or is there any buzz in the blood industry community about what they could be wanting the community to comment on?

I'll turn that over to Richard. I think in general what we do believe is that they still see this as being a considerable patient safety issue that needs to be resolved. And how we move forward from here I think is speculation, but I think Richard may have some additional insights based upon his history with us.

Thank you, Obi. I'll be honest with you, Josh, we have what the FDA has published in terms of that they are delaying the guidance and they are thinking about a VPAP [ph]. We don't really have further insights into - we can speculate, but I'd rather not do that. So we don't have any facts on what they intend approaching in their VPAP, if they in fact have one at this point.

Understood. Congratulations on the EFS contract in France. I was wondering, they did the IPIPAP study and I believe that that enrollment was concluded and they've had it a while. It was my understanding that those results were going to help with the decision process in France of moving to pathogen reduced platelets and it looks like they have. The question is, sorry for the long preamble, but do you know the results of the IPIPAP study? And how meaningful can those results be? Because I do believe that this study was also cited by some of the comments by the New York Blood Center or the AABB in their late comments to the FDA on bacterial safety guidance.

Thanks, Josh. We know that the study has been completed and that it's out for publication, but we haven't seen any of the results. However, as you suggested in your comments, it is something that was factored into the decision-making process by the Ministry of Health and the French regulatory authorities. And so they have seen the data and obviously was supportive of their proceeding with recommending a nationwide rollout of INTERCEPT to address bacterial safety concerns. So, I think it should be out in publication sometime over the course of the next six months and our assumption is that the data is good. Because otherwise, the French probably would have taken a different decision.

Certainly. Any kind of downstream impact from a positive IPIPAP study result in other countries? Either reimbursement decisions or adoption? Clearly the studies have been positive, but how meaningful could this be in terms of how the US clinical community and European clinical communities look at INTERCEPT?

I think actually just the French rollout will be much more impactful. Because they obviously have the best hemovigilance system in the world because they do active monitoring and have people in each hospital looking for transfusion events. Historically that data was very important to us in the context of the FDA approvals, but now with a much broader data set, I think it's going to be just confirming the benefit of INTERCEPT across 330,000 platelet doses annually. Richard, do you have any other thoughts on like how this will influence either European blood safety policy or the US as far as either IPIPAP or the French rollout?

Obi, I have to think it has to have a very positive impact. The fact that the French are moving forward having seen their own data, I think has to stand as a very positive thing for us. Also, they know their own risks through their hemovigilance data and in fact we have a publication coming out that will summarize about 10 years of their data. It is very clear that the INTERCEPT process had a substantial impact on their safety in those places, excuse me, 10% were using it, had a big impact. So I'm very encouraged that in fact other countries will see the data, will hear that the French are moving forward, and will eventually see the IPIPAP data, too, and that this will help our efforts.

Just one last quick one. Just any update on South Africa? Thanks so much for answering all the questions.

Thanks, Josh. We're still aware that they are having discussions about pathogen activation implementation in South Africa, but the current consideration there is that the executive management team still has a lot of holes to fill. They don't have a CEO and a Chief Medical Officer I believe as well, so there's a number of positions that have not been filled in the senior management team at Sandus. And so I think they need to get that filled before they take a decision and hopefully that will be sometime in the second half of the year.

Great, thanks Obi.

Thanks Josh.

We're out of time for any additional questions. I would like to turn the call over to Obi Greenman.

Thank you very much for joining us today and for your interest in Cerus. We will be presenting at three investor conferences next month and we look forward to seeing many of you in person at that time. Our Q3 call will be in early November and we look forward to updating you at that time. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.