Cerus Corporation (CERS) Q3 2018 Earnings Report, Transcript and Summary

Tim Lee - Investor Relations Obi Greenman - President and Chief Executive Officer Kevin Green - Chief Financial Officer Vivek Jayaraman - Chief Commercial Officer Carol Moore - Senior Vice President of Regulatory Affairs and Quality

Good day, ladies and gentlemen, and welcome to the Cerus Corporation Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s call Mr. Tim Lee, Investor Relations Director. Sir, you may begin.

Thank you, operator, and good afternoon. I would like to thank everyone for joining us today. With me on the call are Obi Greenman, Cerus’ President and Chief Executive Officer; Kevin Green, Cerus’ Chief Financial Officer; Vivek Jayaraman, Cerus’ Chief Commercial 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 third quarter ended June 30, 2018, and also describing the company’s recent business highlights. You can access a copy of the announcement on the company’s website at www.cerus.com. I would like to remind you that some of the statements we will make on this call relate to future events and performance rather than historical facts and are forward-looking statements. Examples of forward-looking statements include those related to our future financial and operating results, including our 2018 financial guidance and goals, operating expenses and gross margins, commercial development efforts, future growth and growth strategy, future product sales, product launches, ongoing and future clinical trials, ongoing and future product development, and our regulatory activities as well as the timing of these events and activities. These forward-looking statements involve risks and uncertainty that can cause actual events, performance and results to differ materially. They are identified and described in today’s press release under risk factors, and under risk factors in our Form 10-K for the year ended December 31, 2017, and our Form 10-Q for the quarter ended September 30, 2018, which we will file shortly. We undertake no duty or obligation to update our forward-looking statements. On today’s call, we will begin with opening remarks from Obi, followed by Kevin, who will reviews our financial results and Obi will conclude with his closing remarks. And now, it’s my pleasure to introduce Obi Greenman, Cerus’ President and Chief Executive Officer.

Thank you, Tim, and good afternoon, everyone. We are pleased to report another strong quarter of growth across all major geographers. Third quarter product revenue totaled $15.4 million, a 43% increase year-over-year. During the ongoing commercial momentum through the first three quarters, we’ve raised our product revenue guidance once again to a new revised range of $58 million to $60 million. This revised range represents an increase of 33% to 38% compared to 2017 product revenue. Kevin will provide additional details on the third quarter financials later on this call. We recently returned from this year's AABB meeting, which is a key event for us each fall. As largest U.S. blood banking conference, it provided a unique annual opportunity to understand the state of the industry and to monitor key national trends over time. I'd like to share some of our observations from the 2018 AABB, which took place two weeks ago in Boston. First, we are start to see that in just two short years pathogen reduction has evolved from a controversial hot topic to a mainstream subject. In 2016, many blood centers were still questioning whether pathogen reduction was effective, compatible and/or affordable. I credit the diligent effort of our U.S. commercial team for the educational initiatives that have clearly answered these questions in the minds of most attending the AABB meeting in Boston. With the top five U.S blood banks all on various stages of intercept platelet adoption, we believe there is an increasing awareness about the benefits conferred by pathogen inactivation as well as the chronic underreporting of subject transfusion events associated with conventional platelet transfusions. Second, the INTERCEPT Red Cell program is increasingly prominent as a pending addition to our portfolio. INTERCEPT red cells were covered in presentations from our clinical investigators as well as our blood center partners. As blood centers began to anticipate the planned red cell launch in Europe, the value of pathogen reduction across all three blood components is becoming tangible. The possibility of replacing gamma radiation, CMV testing the possibly even antibody testing for other pathogens, has a strong appeal for blood bankers as they look to cost-effectively safeguard the blood supply going into the next decade. Finally, this year's AABB meeting was immediately preceded by The Trauma Hemostasis and Oxygenation Research meeting known as THOR. THOR provides the physician centric forum to discuss the challenges related to resuscitation and coagulopathy, associated with traumatic injury, applying lessons learned from the battlefield trauma during the wars in Afghanistan and Iraq. These attending trauma surgeons, anesthesiologists and hematologists are all dedicated to improving care for civilian trauma patients as well as current and future war fighters. At this year’s meeting, we’re hearted to see that that audience embraced the central role of cryoprecipitate in improving trauma surgery outcomes. A few brief remarks about our INTERCEPT Red Cell program before we move on to the financial update. As you will recall 60-day prior notification to TUV is a critical step as we approached our planned red cell CE Mark submission. We completed this step in October, and remain on track to deliver on this important regulatory milestone by the end of this year. With regard to our U.S. Phase 3 RedeS and ReCePI studies, we now have three of the targeted four blood center sites producing red cell units, up for our trials. And the most recent addition is the Central California Blood Center whose products will soon begin to support the pending initiation of the ReCePI study. We anticipate the first ReCePIpatient enrollment -- the first ReCePI patient enrollment will begin shortly within next week or two. With that, let me turn it over to Kevin for a review of the financial results.

Thank you, Obi, and good afternoon, everyone. Today we've reported third quarter 2018 product revenue of $15.4 million, up 43% from the $10.8 million recorded for Q3 of last year. Disposable kit sales were once again the primary driver of growth during the quarter, which was partially offset by a decline in the year-over-year illuminator sales. Recall that in Q3 of 2017, we have benefited from the initial shipment of illuminators tied to our expanded supply agreement with the EFS, the French National Blood Service. On a year-to-date basis, product revenue totaled $44.4 million, up 62% compared to the $27.3 million recorded during the first three quarters of 2017. Worldwide demand for our disposable kits increased 85% when comparing Q3, 2018 to the prior year period. North American kit growth was once again a strong contributor to the global growth in kit demand. On a year-to-date basis, demand for disposable kits increased 86% compared to the same period of the prior year. From a product mix perspective, platelet kits accounting for over 90% of the product revenue during the recently completed quarter compared to approximately 75% in the prior year. Separately and not included in our revenue guidance, government contract revenue during the third quarter of 2018, totaled $3.9 million compared to $2.3 million during the third quarter of 2017. On year-to-date basis, government contract revenue was $11.4 million for the first three quarters of 2018 compared to $5.4 million in the prior year period. As Obi noted in his earlier remarks, given our strong performance and increasing conviction in our commercial outlook, we have recently raised our full year product revenue guidance to a range of $58 million to $60 million compared to our previous range of $56 million to $58 million. We anticipate strong kit demand again in Q4, which when measured against Q4 of 2017, should be taken with the context that we have recorded approximately $3 million of atypical orders during Q4 of last year. Those atypical orders include the illuminator sales to stand up all EFS sites, the initial stocking of single-dose EFS kits, the initial purchase by our Italian distributor Kedrion, and from other orders from the Southern EU customers. Now turning from revenue to other third quarter results. Gross margins on product sales for the quarter were 47% compared to 50% for Q3 of 2017. The year-over-year change in gross margins was largely attributable to the volume-based pricing associated with current high-volume customers offset by lower per unit cost to good sold, and to a lesser extent, reduced by unfavorable foreign currency exchange rates. As a reminder, our disposable kits are sold and manufactured in Europe. And as such, reported product revenue and cost of product revenue are impacted by shifts in the foreign exchange rates. Year-to-date, gross margins were 48% compared to 51% during the first nine months of 2017. The year-over-year gross margin change was driven by the same factors which affected the quarterly comparison. I'd now like to discuss our operating expenses, which totaled $24.8 million during the quarter, compared to $20.1 million during Q3 of 2017. On a year-to-date basis, operating expenses were $72.2 million compared to $66 million during the first nine months of 2017. Of the $24.8 million of Q3, 2018 operating expenses, SG&A expenses accounted for $14 million compared to $12.2 million in Q3, 2017. Year-to-date, our SG&A spend has been $42 million compared to $40.1 million during the same period in 2017. The slight year-over-year increase in SG&A was primarily due to increased commercial activity in the U.S. And we expect SG&A expense to remain relatively stable through year end as we continue to realize leverage from our P&L. Research and development expenses for the quarter were $10.8 million compared to $7.9 million during the year prior. The increase was primarily tied to the clinical development of the INTERCEPT red blood cells, including preparation for the plant CE Mark submission later this year, and clinical activities for our Phase 3 studies in the U.S. as well as activities aimed at expanded labor claims on INTERCEPT platelets and plasma. Through the first nine months, R&D expenses totaled $30.1 million compared to $25.9 million in the prior year period. Net loss for the third quarter of 2018, totaled $14.2 million, or $0.11 per diluted share, compared to a net loss of $13.4 million, or $0.12 per diluted share, for the prior year period. Year-to-date, net loss totaled $41.4 million, or $0.32, per diluted share, compared to a net loss of $49.1 million or $0.46 per diluted share in the first nine months of 2017. In terms of our balance sheet, we ended the third quarter in a strong position with approximately $119 million of cash, cash equivalents and short-term investments on hand compared to $61 million at the end of 2017. With that, let me turn the call back to Obi for some closing remarks.

Thank you, Kevin. If you recently outlined at our Institutional Investor Meeting in Boston, we believe we are well-positioned to deliver sustained top-line growth not just for the balance of 2018, but for the years to come. Comments from our external speakers at that event, Dr. Susan Stramer, Vice President of Scientific Affairs at the American Red Cross; Professor Ed Snyder from Yale University; and Dr. Melissa Cushing from Weill Cornell in New York. All increased our confidence that there is a fundamental shift underway in the field of transfusion medicine. All three speakers participated in the compelling discussion on the momentum toward increased intercept platelet adoption of United States. They see patent reduction as necessary to address safety concerns associated with clinically associated subject transfusion events. Moreover, they articulate the value of reaching 100% pathogen reduced supply both the simplifying institutions, inventory management and also to avoid the ethical dilemma of how to choose which patients continue to receive untreated units if their inventory remains mixed. Dr. Stramer also provided commentary about the importance of pathogen reduction for the American Red Cross and its long-term strategic planning. To share the Red Cross's vision, for expanding the INTERCEPT platelet reduction to meet hospital demand and drive value from this innovation in their product offering. As expected, BLA -- BLA approvals are a critical element in their expansion plans. So the initial BLA at their Baltimore facility anticipated before yearend. Following, that initial BLA approval, The Red Cross is preparing for growing schedule of monthly submissions across the other 12 sites currently producing INTERCEPT platelets, with a goal of all sites being licensed by late Q2 2019. As a reminder, these additional BLA submissions will be under a CBE-30 protocol, a streamlined review process allowing changes to become effective after 30 days. This was demonstrated for an accelerated expansion of INTERCEPT platelet distributions over the following six to 12 months as their net platelet export centers are able to supply the Red Cross network nationally. The speakers also expressed enthusiasm about the four INTERCEPT portfolio becoming available including both INTERCEPT blood cells and INTERCEPT cryo. Emerging impacts of these risks such as from tick-born disease were mentioned there's a particular driver for the future use of INTERCEPT red cells, as well the potential to replace the radiation with Cerus as an obvious benefit to the segment of patients most at risk for both infectious complications and transfusion associated graft versus host disease. Overall, Investor Day program articulated the reasons we are optimistic about the future of pathogen reduction. As you all noted from our press release yesterday about the FDA granting breakthrough device designations for our pathogen reduced cryoprecipitate product, we are excited about addressing the unmet clinical need associated with massive bleeding. Breakthrough status confirms several advantages to our program by enabling and even more proactive dialogue with the FDA and the potential for an expedite reviews of our PMA supplement that we expect to submit in the second half of 2019. With the FDA validating the need for this product and the continued interest we are hearing from physicians dealing with coagulopathy and trauma, cardiovascular surgery and obstetric hemorrhage, the launch of cryo is a unique opportunity for the company. In summary, we are excited about the opportunities ahead of us, and are poised to advance our mission to establish INTERCEPT as a standard of care for transfuse blood components globally. Before we open up the call for questions, let me take an opportunity to recognize and acknowledge the efforts of the Cerus team for their dedication to bringing pathogen reduction technology to patients around the globe, especially many Cerus employees that are working diligently on the red cell CE Mark submission. Operator, please open the call for questions.

Well, thank you all for joining us today and for your interest in Cerus. We will be participating in the two upcoming investor conferences later this month. Next week, we will be presenting at the Stevens New York Investment Conference, and the following week we will be presenting at the Canaccord Genuity Medical Technologies and Diagnostic Forum, also in Europe. We hope to see many of you there in person. Thanks very much.

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