Q1 2023 Cerus Corporation Earnings Call

May 4, 2023

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Good day and welcome to the Cirrus Corporation's first quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone you will hear an automated message advising you that your hand is raised to withdraw your question simply press star one again.

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host Jessica Hanover, Vice President of corporate Affairs.

Jessica Please go ahead.

Thank you and good afternoon I'd like to thank everyone for joining us today as part of today's webcast. We are simultaneously disclaimer slides that you can follow you can access the slides from the Investor Relations website at IR Dot theorists dot com.

With me on the call today are Obi Greenman, Cerus, President and Chief Executive Officer, Kevin Green <unk>, Chief Financial Officer, Dr. Laurence Koresh Terrace, as Chief Scientific Officer Vivek.

<unk> Raman terraces, Chief operating officer, and Carol Moore, Cirrhosis, Senior Vice President of regulatory affairs and quality.

<unk> issued a press release today announcing our financial results for the first quarter ended March 31, 2023, and describing the company's recent business highlights.

You can access a copy of this announcement on the company website at Www Dot <unk> Dot com.

I'd like to remind you that some of the statements we will make on this call related to future events and performance rather than historical facts.

And our forward looking statements. Examples of forward looking statements include those related to our future financial and operating results, including our 2023 product revenue guidance and goals operating expenses anticipated cash use from operations gross profit and gross margins as well as commercial development efforts.

Future growth and growth strategy future product sales.

This launches ongoing and future clinical trials ongoing and future product development, and our regulatory initiatives, including the timing of these events and activities.

These forward looking statements involve risks and uncertainty that could cause actual events performance and results to differ materially. They are identified and described in today's press release and under risk factors in our Form 10-Q for the quarter ended March 31, 2023, which we will file shortly we undertake no duty or obligation.

<unk> to update our forward looking statements.

On today's call. We will also be discussing non-GAAP financial measures, including non-GAAP . Adjusted EBITDA. These non-GAAP measures should be considered a supplement to and not a replacement for measures presented in accordance with GAAP for a reconciliation of non-GAAP financial measures to comparable GAAP financial measure.

Please refer to today's press release.

We'll begin today with some opening remarks from Obi followed by Jose to discuss some recent business highlights and Kevin to review, our financial results and expectations for 2023.

And now it's my pleasure to introduce Obi Greenman, <unk>, President and Chief Executive Officer.

Thank you Jessica and good afternoon, everyone.

2023 has begun as we've previously anticipated looking ahead, we are confident in our outlook for the full year.

Accordingly, we are reiterating our full year product revenue guidance range.

$165 million to $170 million.

In the first quarter, we successfully completed a debt refinancing.

Which Kevin will cover later in greater detail.

We ended the quarter with a strong cash position.

We remain committed to reaching adjusted EBITDA breakeven this year as we grow the top line, while managing operating expenses in a disciplined manner.

This should allow us to self fund the growth in our commercial business our manufacturing capacity.

And our pipeline.

We are proud to see the continued and growing role that pathogen and activation with the intercept blood system plays in efforts to safeguard the blood supply globally.

Earlier this year, we were pleased by the acceptance and subsequent publication in the journal transfusion of our longitudinal analysis of reported annual Hema vigilance data from France, as regulatory authority NSM covering over 11 years and over 1 million intercept treated platelet components transfused.

Data show stable platelet utilization trends, coupled with reduced patient risk of adverse health effects, Julian Francis conversion to universal seven to intercept platelets in particular.

Transfusion transmitted bacterial infections were reported with intercept platelets compared to 46 infections, including six deaths with conventional platelets.

We're also making progress on our APAC strategy during the quarter, we entered into a new supply agreement with a Hong Kong Red Cross transfusion service.

Is now initiated use of intercept plasma to complement its ongoing use of intercept platelets.

At a much larger scale and in line with our previous comments during the 2022 year end call in February .

In collaboration with our China JV partner <unk>, we have submitted our intercept platelet dossier to the Chinese regulatory authority and MPA.

I recently visited <unk> in China, with our New Board director Dr. Hua Sean.

I left are meeting with optimism for the opportunities ahead of us and China, where player demand outstrips supply and the need for increased platelet transfusion safety and availability is high.

Over $2 5 million platelet doses are transfused each year in China.

And this figure is expected to grow low double digits for the next decade to become the largest market opportunity for intercept globally.

There's also strong interest by our partner <unk>, K and pathogen reduced red blood cells in China, a market opportunity that is growing rapidly and is expected to double the size of the U S market by 2030.

We received MBR sort of vacation for intercept platelet processing sites and the European Union during the first quarter as well.

I am proud of the Crs team for achieving this milestone in such a timely manner.

Particularly as we know the MTR transition has created challenges across the industry.

With respect to our intercept red blood cell program. We've continued to work on the questions. We receive from our EU competent authority CBD.

In the U S. Enrolment continued during the first quarter in our phase III Red blood cell clinical trials.

And we continue to track to our previously communicated timeline of completing enrollment this year for the recipe study and next year for the retro study supported by continued funding from BARDA.

During the quarter, we received a commitment from BARDA for an additional $33 million.

The ongoing partnership with BARDA for the development of the U S. Red blood cell clinical program remind us again of how pathogen reduction of blood components has also been incorporated into efforts around the globe to safeguard the blood supply.

This is also evident in a few weeks ago and then the international symposium organized by Canadian Blood services, and hemoglobin to discuss strategies to mitigate the risk of transfusion transmitted infections falling removal of blood donor deferrals.

Multiple speakers recognize the important role of pathogen reduction for blood safety and availability.

Including positive commentary on the experienced to date in Canada.

For daily protection from bacterial contamination of platelets to pandemic preparedness against emerging pathogens.

The intercept blood system continues to be recognized and utilize to ensure patients have access to safe and effective blood components when needed.

I would like now to turn the call over to Blake to discuss the first quarter commercial highlights.

Thank you Robby and good afternoon to everyone joining on today's call.

First quarter sales results were in line with our expectations given some of the previously referenced customer inventory reduction measures that took place during the period.

From a platelet perspective, both in the U S as well as the EMEA region. We enjoyed continued engagement with existing customers, while also taking tangible steps towards unlocking future growth opportunities.

We are fortunate to have global leaders in the field of transfusion medicine that have decided to protect 100% of their platelet supply with intercept.

Their decisions resonate with customers across the globe, you blood centers and hospitals implement pathogen reduction.

Sure. It's a hospital in Berlin now trends using intercept platelets.

Seven of the top 10 hospitals in the world utilizing intercept that helps safeguard at least some portion of their platelet supply.

We are fortunate to collaborate with these leading institutions and take our responsibility as a constant partner very seriously.

As previously noted we are undergoing a significant restructuring of our U S. Commercial organization in order to optimize our customer facing efforts and expand our presence in hospitals and <unk>.

Pleased to report that we have filled all but one of our open sales positions throughout this process. We have been impressed with the caliber of applicants as we transition to more clinician facing sales activity. It is imperative that we employ experienced hospital based sales professional this is especially important for the IFC rollout as we retain responsibility for <unk>.

The nickel awareness and demand generation, we have almost doubled our hospital sales staff over the past year.

With respect to IFC, we are setting the stage for accelerating product adoption. We are working to generate data that will further support the value proposition for IFC, including our recently initiated study with a common academic medical center in New York, We are looking forward to continuing to share clinician experiences with IFC at upcoming clinical conferences.

The society for obstetrics anesthesia, and Perinatology and the society of cardiovascular Anesthesiologists annual meeting.

In international markets, we continue to push to enter new markets and broad global patient access to intercept for.

For example, we are fully engaged in our support of Canadian blood services, where CBS as they continue to rollout intercept platelets across their service area.

As previously described we anticipate 12 to 18 months for full deployment across all Cvs site.

This process is progressing well and we are grateful for our partnership with CBS in parallel we have initiated a validation study with technical that the other blood supplier in Canada to evaluate the utility of intercept platelet production operation.

With the upcoming Canadian Society of Transfusion Medicine Conference. Later. This month, we are excited to share news of our progress in Canada with a broader clinical volume.

While Q1 2023 presented significant headwinds I am encouraged by the way the global team navigated the challenges we.

We exited the quarter in a strong position with existing customers loss of MLP annually, making material strides cultivating new line.

We grew and enhanced our hospital facing staff, while continuing to accumulate clinical evidence in support of our products.

In sum, we are well positioned to grow the business and most importantly drive expanded patient access to intercept as we push to do our part to help safeguard the global blood supply.

I will now turn it over to Kevin to discuss our results and outlook in more detail.

Thanks, Vic and good afternoon, everyone.

Today I'd like to discuss our financial results for the first quarter, but also spend some time outlining the building blocks, we've put in place for strategic financial health as we move ahead and returned to growth.

Specifically I'll be discussing our focus on achieving breakeven on adjusted EBITDA.

Including gross margin expansion initiatives and management of operating expenses as.

As well as our recently completed term loan and revolving line of credit refinancing of expansion.

Consistent with our expectations, we posted first quarter 2023 product revenue of $31 million representing.

Representing a year over year decrease of 17%.

This was primarily driven by U S customers that recalibrated their inventory levels in an effort to manage their supply chain and working capital.

We understand that this dynamic is largely complete and expect that we will see a return to more normalized order patterns of growth.

Customers continue to prioritize intercept and build a bacterial safety compliance strategy inclusive of our product offerings.

EMEA product revenues were down 5% year over year and up 4% sequentially.

The year over year decline was almost exclusively driven by FX rates.

Euro to U S. Dollar exchange rates averaged 1.07 during the first quarter of 2023 compared to approximately $1 one two in the prior year quarter.

In addition to our product revenue and not included in our guidance.

Government contract revenue totaled $7 $5 million in Q1.

To $5 $6 million from the prior year period.

Included in our government contract revenue are the revenues recognized as reimbursement under our contract with BARDA.

Our agreement with the FDA to further whole blood pathogen reduction.

Our more recent authorized pathogen reduced cryoprecipitate agreement with the U S Department of defense.

Turning now to our product gross profit and gross margins.

Our first quarter.

Gross profit was $17 3 million compared to $19 4 million during the prior year period, driven by the lower top line.

However.

Gross margin for the quarter improved meaningfully to <unk> 55, 8%.

Over 400 basis points, when compared to the prior year period gross margin of 51, 7%.

This marks the fifth consecutive quarter of gross margin improvement and.

That was driven by economies of scale.

Certain cogs reduction initiatives that are currently providing a benefit.

And to a lesser extent foreign exchange rates, whereby we sell and recognize revenue in EMEA at current FX rates.

By selling euro denominated inventory purchased several months ago at lower FX rates.

We are working closely with our manufacturing partners and have several additional cost reduction initiatives underway, which we expect will contribute to continued margin expansion over time.

These include expansion into additional lower cost sites for certain components and completed kits.

Moving on our first quarter operating expenses totaled $38 9 million.

An increase of 12% over the prior year period and.

And included $5 7 million of noncash stock based compensation.

By specific expense type.

First quarter R&D expense totaled $17 4 million.

Compared to $14 1 million during the prior year.

The increase in R&D expense was driven by additional personnel.

Overall cost of attracting and retaining talent.

And costs associated with our next generation Illuminator and increased government contract work.

First quarter SG&A expense was $21 6 million compared to $27 million in the prior year period.

The slight increase in SG&A expense is primarily due to costs associated with increased U S sales team members.

On to drive growth in platelet and IFC sales.

Legal fees.

Overall cost of attracting and retaining our employees.

On the bottom line reported net loss attributable to <unk> for the three months ended March 31 2023.

Widened by $3 3 million or.

27% when compared to the same periods in 2022.

Net loss attributable to <unk> for Q1 totaled $15 6 million or <unk> per diluted share.

Third to $12 3 million or <unk> <unk> per diluted share for the prior year period.

Our first quarter losses as reported by our non-GAAP adjusted EBITDA totaled to a negative $9 8 million.

Compared to a negative $3 7 million during the first quarter of 2022.

Turning to the balance sheet and cash flows we ended the first quarter and a strong cash position with $94 $7 million of cash and cash equivalents on the balance sheet.

In terms of cash utilization or cash used from operations was $8 5 million.

Compared to $21 5 million during the prior year period.

This improvement came despite the lower revenues and a marked investment in inventory for future growth.

In March we completed the refinancing of our term loan and revolving line of credit with Midcap.

The revised terms allow for an additional three or more years of runway before principal must be repaid.

In addition, we have two optional tranches for additional capital to help us invest in cost reduction and capacity expansion initiatives.

Additionally, we have expanded the revolving line of credit to allow us to offset investment in working capital as our business continues to grow.

This amended facility with midcap should provide us sufficient capital for the foreseeable future.

And as a testament to the trust that Midcap has in our business, despite an extremely difficult credit markets.

In closing as we advance through 2023, we expect the resolution of the challenges that impacted our U S product revenue.

We reiterate our full year 2023 guidance range of $165 million to $170 million.

With the future growth of our commercial business.

Steady if not improving gross margin contribution.

Management of our operating expenses, we remain committed to achieving breakeven for adjusted EBITDA. This year.

With that let me turn the call back over to the operator for Q&A.

Thank you at this time, we will conduct the Q&A session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question simply press Star one again.

Please standby, while we compile the Q&A roster.

And our first question comes from the line of Brandon Folkes with Cantor Fitzgerald Brandon. Your line is open. Please go right ahead.

Alright, Thanks for taking my questions and the first on the progress.

Can you just elaborate perhaps on how much of that rig cost inventory with down.

Was completed in <unk>.

Here are the comments that largely behind you, but was that largely behind you.

End of <unk>.

And then.

Secondly, maybe just can you help us think about the.

Revenue opportunity in China. Thank you very much.

Thanks Brandon.

I'll take the first part of that question I'll take the second part of the reasons over to China as well as the mine.

Sure I'm happy to do that and go.

I'll hand, it back to you regarding China.

So on the first part we do feel that most of the inventory management issues are behind us exiting Q1, and I think that is buffeted by what we're seeing so far quarter to date in terms of order patterns for Q2, and so we are encouraged about that and it was really contemplated when we.

<unk> ended the year with respect to China, that's a tremendous market opportunity for us we had the opportunity to visit with our joint venture partner earlier. This year. So can provide a little bit more detail, but that is a market that has the potential to be the largest market in the world in terms of platelet.

Opportunity and we feel like there is a tremendous clinical interest and demand for intercept.

I'll be I'll hand, it back to you.

Yes, the only other thing.

I would say is that the interest by our Chinese partner in Red zones, as well was really.

Hey, Bob.

Validating just given that they see the market opportunity.

Z BK.

As about 70 plus percent market share in deposits designated positive business. So they really are very acute and with our customers.

I have a strong presence across the entire country.

It really.

Happy with the progress, we're making there and it was great to get that.

The submission recently.

Great. Thank you very much appreciate you taking my questions. Thanks, Brian .

Okay.

And by well I bring the next call or to the stage.

Yes.

And our next question comes from Jacob Johnson from Stephens Jacob Your line is open. Please go right ahead.

Good afternoon. This is Matt on for Jacob.

Just to follow up on the last question.

Now that you've submitted the dossier in China, what is the timeline for approval there.

The next does matter is that we.

We should hear some feedback from the MTA as to whether they need additional in country and clinical data.

We did submit a lot of data.

From around the world.

Part of that submission. So there is a degree of confidence.

We submitted may be sufficient.

As well as some additional clinical study out of the study we did in Hong Kong.

But we won't have visibility into.

Whether an additional clinical trial is required until sometime in the second half of the year.

Great and then on the commercial reorganization and collision clinician focus the things, particularly in important for IFC, but what does it mean for your platelet efforts.

That's a good question I would like to cover.

Yes happy to.

It's beneficial on dose and certainly from an IFC standpoint, we own responsibility for.

Clinical awareness and demand generation and so getting into hospitals talking to treating clinicians is absolutely an imperative for us expanding the hospital based sales team.

That is experiencing therapeutics is critical and has significant benefits for platelets as well because if you think about the opportunity to go into hospitals.

Now that pass through reduced platelets are standard of care in the U S are going into institutions that have familiarity with Pi. We can also go in hospital debit expressed an interest in IFC and our earlier in the adoption curve for platelets and stock interest there as well so we view it as synergistic in terms of impacting both franchises.

Certainly is critical to launching the new therapy with IFC.

Great. Thanks for taking the questions.

Thank you.

And as a reminder to ask a question.

You'll need to press star one on your telephone and wait for your name to be announced.

We are standing by for further questions.

Sure.

And one moment for our next question coming from the line of Matt Blackman at Stifel. Matt. Your line is open. Please go right ahead.

Thank you and thank you for taking my question I apologize I've been hopping around calls so.

That's something you addressed in the prepared comments or in the Q&A apologies.

Two questions from me just curious.

On IFC is there any way to provide any sort of metrics to help us better understand where you are in the ramp whether it's number of accounts or utilization just anything you can provide a picture of the adoption curve.

And then.

Beyond clinical data generation, which we've talked about in the past what else are you doing from a selling standpoint to help drive uptake and then I've got a follow up.

Yes, Thanks, Matt.

Thank you and I'll turn it over to you for these questions.

Sure happy to.

Glad you could join us insurance quite busy for you right now with the peak earning season, but.

Start off one of the things we talked about earlier in the call was we made a concerted effort to increase.

Our feet on the street and we've now nearly doubled the number of hospital based sales professionals, we have within the organization. So the first thing we need to do as you're fully aware is really get them educated trained and work diligently to reduce their time to productivity is that it can start generating.

Product use cases, so we're tracking right now is really a hospital visits and engagements and then on the front end the contract initiation process beyond clinical demand generation and awareness that.

Sort of long haul in the tent is the contracting process, depending upon the institution or group of institutions. We may have to go to a new product committee, we mapped that separate meetings to drive clinical awareness and then to speak to our non clinical decision makers. So it really varies by institution, but that processes is something we're tracking.

Very closely and so.

Now that we were able to get really be successful in terms of accelerating our hiring while maintaining a high level of quality that focus on training education, and then contract initiation and so thats really where the bulk of the effort is for the sales team.

I'll be I'll hand, it to Neil or I don't know, Matt if there's a follow up on that.

And then the second part of the.

The question was just around what are we doing besides sort of the clinical studies too.

Create awareness.

Maybe you can comment on some of the <unk>.

The case studies in that.

We're seeing coming out of the sites that are in routine use.

So certainly generating two studies in.

And use the information that we can share with other institutions and interested parties is something that a.

A big area of focus we recently talked about a case study that we generated coming out of the University of Florida Shands Hospital.

Whether it's on the impact of.

I see from a clinical value standpoint, or the benefit associated with ISC relative to wastage reduction an attendant cost saving.

Peer to peer dynamic in terms of really gaining interest credibility and ultimately adoption of our products critical on sale you tend to get those white papers and use cases, one in advance of sort of controlled clinical data, we're focusing on getting that out there.

Great I appreciate that and then.

Again apologies if you updated some of the stuffs that I'm about to ask but we haven't.

In conversations with some of the admittedly smaller blood banks, but we're hearing some pretty consistent feedback on a couple of hurdles to adoption I was speaking about platelets I should've mentioned that at the outset.

And the two items I don't think you can surprise you, but the two items that were most often mentioned was the seven day label.

There's two extra days were critical it may make a big difference just minus where we are with label expansion.

There's the potential we could see that in 2023 or is that 2024.

And I guess, the bigger one and seemingly harder to tackle.

Are the guard bands.

Is there anything you can do or maybe what the process is to modify those guard band because it SBA driven is it sort of similar to the platelets guidance documents that were waiting for all those years I, just I guess I don't really fully understand who sets those and.

It's whether it's something that over time, you can nudge maybe more favorably.

For for intercept.

Any commentary on both those things would be really helpful. I appreciate it. Thank you.

Yes, I'll take a shot at that Matt and thank you do you have any additional comments please jump in but at least on the seven day label claim as you know, Matt we have that claim broadly across Europe and also in Canada now and so we do believe our products performed well onto some of the shelf life, what we need to do.

To get that label, United States do another recovery and survival study.

Right now we have.

These days five studies that was imposed a global commitment.

Underway that will inform our ability to do it six or seven study.

We're really looking at how do we accelerate that it will be a 2023 event, but we definitely are focused on that as it relates to the guard bands.

It's surprising because I think.

<unk> customer the American Red Cross has really been able to optimize intercept with third collection practices as we've now seen.

Our split rate.

Ever had even after implemented intercept and so it really comes down to sort of the operational.

Efforts of our team with the blood center operations folks to we.

No we can do that.

Based upon our experience in the us, but also more broadly across Europe . So I don't think thats a limiting factor.

But it's certainly something we have to overcome.

With blood centers are starting to implement intercept.

Any additional commentary there.

No actually that was helpful.

Thanks.

Yes.

Thanks, Matt.

Okay.

Thanks.

And that concludes our Q&A I would like to turn it back to Obi Greenman, Chief Executive Officer for closing remarks.

Well, thank you again for joining us today.

Interesting service, we look forward to continuing to update you on our progress throughout the rest of the year.

Thanks Brendan.

This does conclude our program you may now disconnect.

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Q1 2023 Cerus Corporation Earnings Call

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