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Cerus Corporation (NASDAQ:CERS)
Q4 2019 Earnings Call
Feb 20, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Cerus Corporation Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] After the speaker presentation there will be a question and answers session. [Operator Instructions].

I will now turn the conference over to your host for today, Mr. Tim Lee. Sir, you may begin.

Timothy L. Moore -- Investor Relations Director

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, 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 fourth quarter and full year ended December 31, 2019 and also describing the company's recent business highlights. You can access a copy of this announcement on the company website at www.cerus.com.

I'd like to remind you that some of the statements we will make on this call relate to future event 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 and putting our 2020 financial guidance and goals, operating expenses and gross margins, commercial development efforts, future growth and growth strategy, future products sales, product launches, the impact or current and future products on blood center operations, 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 risk and uncertainty that can cause actual events, performance and results to differ materially. They're identified and described in today's press release and under risk factors in our Form 10-K for the year ended December 31, 2019, which we will file shortly. We undertake no duty or obligation to update our forward-looking statements.

On today's call, we'll begin with opening remarks from Obi, followed by Kevin, who will provide a detailed financial review -- a detailed review of our financial results and with Obi providing closing remarks.

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

William M. Greenman -- President and Chief Executive Officer

Thanks, Tim. Good afternoon, everyone, and thank you for joining us on the call. As a result of the efforts of the entire Cerus team, 2019 was another standout year commercially. We finished 2019 with the highest quarterly product revenue ever, reported at $20.9 million, up 27% compared to the fourth quarter of 2018. For the full year, product revenue totaled $74.6 million at the top end of our revenue guidance range of $72 million to $75 million.

Over the past three years, we have doubled our product revenue. But even more importantly, there have now been approximately 7 million transfusable units of INTERCEPT platelets and plasma shipped worldwide, and we are still early in the global adoption ramp. With the FDA's issuance of the final guidance on the bacterial safety of platelets in September of last year, US blood centers and hospitals have until the end of March 2021, to implement procedures to safeguard their platelet supply.

We're well positioned to help our blood center customers in the US through the remaining 13 months of the compliance period for the FDA guidance documents. Beyond providing the proactive benefits conferred by a robust pathogen reduction technology, INTERCEPT also allows blood centers through these platelet products at least a day earlier compared to the other options put forth in the guidance.

By streamlining the logistic that's delivering platelet products to hospitals, we were able to demonstrate cost savings by making certain blood center processes and assays, such as gamma irradiation, CMV serology testing and Zika virus testing redundant, thereby minimizing the number of product codes and eliminating specific procedure costs. For the anticipated FDA approvals for our extended day six label claims, and our triple storage set for platelets, we believe that the INTERCEPT value proposition for blood cleaners will be made even more compelling.

In terms of US market share, based on our fourth quarter domestic product revenue, we estimate that we exited 2019 at approximately 16% market penetration, compared to a 11% in fourth quarter of 2018. During 2019, the number of US treatable platelet doses shipped increased nearly 80% compared to the prior year. This leads us with a substantial untapped US market opportunity.

Through 2020, we expect our US market penetration to increase meaningfully and the ramp in adoption to continue even past the compliance period. 2020 will also be defined by the anticipated launch of our pathogen-reduced cryoprecipitate product in the US.

We are tracking on plan to submit our PMA supplement in the first half of this year, which translates into a potential approval by year-end. This fall, we plan to submit for a new technology add-on payment or NTAP for a pathogen reduced cryo with the Centers for Medicaid and -- Medicare and Medicaid Services or CMS.

Given the FDA breakthrough device designation awarded to pathogen-reduced cryo, we're optimistic that we will receive an NTAP approval in 2021, which we believe will meaningfully facilitate market adoption beyond the product's intended impact on clinical outcomes for trauma, cardiovascular surgery, and maternal hemorrhage patients. The potential $300 plus million US market for pathogen-reduced cryoprecipitate and its likely impact on critically bleeding patient survival outcomes has our whole team at Cerus incredibly excited about the anticipated product launch.

Finally, we made meaningful strides last year with regard to our INTERCEPT red cell program, both in the context of the CE Mark review process and the Phase 3 clinical studies in the US. With the qualification studies on our GMP unifying [Phonetic] labs from our news supplier is expected to be completed in the second quarter, we plan to transition our CE Mark submission, the new medical device regulation or MDR pathway in the second quarter.

At this juncture, we continue to believe the CE Mark approval from red blood cells is a 2022 event until we have more visibility into the new MDR process. We're working diligently to compress that timeframe and are optimistic.

With that, let me turn it over to Kevin for a detailed review of our Q4 and full year financials.

Kevin D. Green -- Chief Financial Officer

Thank you, Obi. And good afternoon, everyone. Today, we recorded fourth quarter 2019 product revenue of $20.9 million, up 27% from the $16.5 million recorded during Q4 of 2018. For the full year, product revenue totaled $74.6 million, an increase of 23% compared to $60.9 million reported for 2018. These results are unchanged from the preliminary full year results we announced in early January.

In terms of product mix sold during the quarter, platelet kit sales accounted for approximately 85% of reported product revenue. Looking ahead to 2020, we expect robust platelet kit growth, driven largely from increased utilization of INTERCEPT by US blood centers as they take action to comply with the FDA guidance document. Accordingly, we expect full year 2020 product revenue will be in the range of $89 million to $93 million, representing growth of approximately 20% to 25%.

Government contract revenue totaled $5.6 million and $19.1 million during this three and 12 month period ended December 31, 2019, respectively, up from the $3.7 million and $15.1 billion reported during the comparable periods of 2018. Increased enrollment in our RedeS and ReCePI studies, preparatory activities for additional clinical activity, as well as CMC and in vitro development drove the increase and are expected to continue through 2020.

Now, let's move the discussion to our reported gross margins. For the quarter, gross margins were 56%, compared to 49% for the prior year period. The significant improvement in gross margin was attributable to economies of scale and lower per kit COGS, resulting from the increased volume of kits manufactured to meet current and expected growth and demand for our products.

Additionally, gross margin improved as a result of the favorable product mix shift to double those platelet kits in France. For the full year, gross margins were 55% compared to 48% during 2018. We expect gross margins will be relatively stable in the mid-50% range, as we look ahead to 2020.

I'd now like to discuss operating expenses, which totaled $33.6 million during the quarter, compared to $27.3 million during Q4 of 2018. For the full year 2019, operating expenses totaled $126.6 million, compared to $99.4 million during 2018. The investments we've made in SG&A and R&D during 2019 allow us to maximize the growth opportunity in 2020 and beyond.

Of the total operating expenses, SG&A expenses during the quarter accounted for $17.2 million, compared to $14.8 million during Q4 of 2018. The increase was driven from investments we've made in our supply chain capabilities. The continued preparatory activities for anticipated US pathogen-reduced cryoprecipitate launch, as well as higher non-cash compensation costs.

For the full year, SG&A spending totaled $66.2 billion, compared to $56.8 million during 2018. We're committed to generating leverage from our SG&A investments, balancing discipline in SG&A spend with investment in activities that lead to revenue generation.

Turning now to R&D expenses. Research and development expenses for the quarter totaled $16.4 million, compared to $12.4 million during the prior year. The increase in R&D expenses was largely due to product enhancement initiatives and activities tied to legal claims expansion, including our triple set for platelets, as well as our six, seven day label claim.

In addition, development activities to support our anticipated PMA supplements for pathogen-reduced cryoprecipitate, as well as activities tied to the development of our red blood cell program drove portions of the increase in R&D. For the full year, R&D expense totaled $60.4 million, compared to $42.6 million during the prior year period.

Looking ahead, we anticipate higher R&D spending in 2020 due to expected increases in BARDA-related activities and the ongoing development of our triple set to the US market, six, seven day label claim and the MDD to MDR cutover for our products. As a reminder, BARDA-related R&D expenses are reimbursed as government contract revenue.

Now, let's look at the bottom line. Net loss for the quarter totaled $16.9 million or $0.12 per diluted share, compared to a net loss of $16.2 million or also $0.12 per diluted share for the prior year period. For the full year, net loss was $71.2 million or $0.51 per share, compared to a net loss of $57.6 million, or $0.44 per share diluted share for 2018.

As previously mentioned, we've made investments that will create a platform for us to make INTERCEPT the standard of care and which will feather down as we complete certain R&D activities.

I'd like to make a few comments about our balance sheet. We ended 2019 with $85.7 million of cash, cash equivalents and short-term investments on hand. To supplement that balance, earlier this year we completed a public offering of common stock, raising gross proceeds of $63.3 million.

With the FDA guidance document finalized and a balance sheet that allows us to make INTERCEPT a preferred choice for US blood centers and to launch our cryoprecipitate product, Cerus is extremely focused on executing to profitability. With the completion of the recent offering and given the opportunities in front of us, we believe we can attain profitability during our strategic planning period.

We are confident in our ability to continue growing, not only the top line, but to ensure quality of supply and continued gross margin improvement. At the same time, many of our current non-BARDA research and development programs are expected to be complete in the near-term, lowering R&D costs, and of course, we have a tremendous opportunity to increase the leverage from our SG&A spend.

With that, let me turn the call back over to Obi for some closing comments.

William M. Greenman -- President and Chief Executive Officer

Thanks, Kevin. Before I wrap up the call, I wanted to briefly comment on the recent outbreak of the COVID-19 virus, which originated in Wuhan, China. Whether the coronavirus like SARS, MERS or COVID-19 are mosquito-borne virus like Zika, chikungunya and West Nile. The only real surprise would be to not have another one in the near future.

As we have frequently witnessed, these pathogens make their presence known quickly and with impact via the human toll of morbidity and mortality and the reverberation on societal infrastructure. The efforts required by healthcare providers across the globe as they address an emerging pathogen are monumental in their scope.

Amongst many critical parameters, safety and availability of blood and its components for transfusion are fundamental to our vital health system and to ensuring positive outcomes for seriously ill and injured patients. Blood transfusion has been noted as one of the most common procedures administered in hospital -- to and possible inpatients and in many cases, is nothing short of life saving.

Cancer patients who receive the vast majority of all transfused platelet products are particularly susceptible to infectious risks due to their underlying disease and aggressive treatment protocols. Emerging pathogens pose an ongoing threat to the safety and availability of the blood supply, while travel in train have historically been the primary means by which emerging pathogens move dynamically across the world, rapid urbanization over the last century has also introduced large numbers of people to previously undeveloped areas. All allow diseases to move into older urban areas where population density has increased. Changes in rainfall, temperature and seasonal patterns have been shown to contribute to expanded vector populations and ranges, two factors that may allow diseases to spread into areas where weather or elevation may have previously served as a protective barrier.

The role of blood supply is helping to protect society, yet simultaneously needing protection from pandemic risks was recognized by the inclusion of blood center considerations in Pandemic and All Hazards Preparedness and Advancing Innovation Act signing the law last June in the United States.

Along these lines, the European Center for Disease Prevention and Control or ECDC convened a panel of experts last April to discuss emerging infectious threats

And the role of pathogen reductions to protected blood supply. Several examples recited, in which pathogen reduction has been deployed to maintain and protect the critical supply of platelets.

To address the impact of an emergent pathogen on the blood supply adequately and rapidly, we must deploy all available tools at our disposal. Donor deferrals can help screen out potentially infected donors. They can have a great impact on availability and regional self-sufficiency during the epidemics.

Testing can screen out infected products, but tests with appropriate sensitivity and specificity are not readily available in an emergency situation. Pathogen reduction can proactively address a vast number of pathogens.

Strategically deploying all three safety measures allows for addressing all the needs of the blood supply, keeping blood components safe and readily available. This kind of a multipronged approach for blood safety availability is our best chance to satisfy the need for the sustained preparedness espoused by the public health community.

In closing, I want to take a moment to thank all Cerus employees who helped make 2019 a success and for their continued passion for our mission to make INTERCEPT the global standard of care. Their hard work and determination made possible achieving a many important milestones in 2019. I'm looking forward to all the great things that we will realize together in 2020.

Operator, please open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Mathew Blackman of Stifel. Your line is open.

Mathew Blackman -- Stifel, Nicolaus and Company -- Analyst

Good afternoon, everyone. Thanks for taking the questions. It didn't sound like Vivek was there in the role call that Tim did. So maybe, Obi, if you could tackle, I've got a couple of questions with a follow-up. But could you just maybe talk in more detail in general about the level of blood center preparedness today versus, say, September 30th? And we all know that Red Cross has been ahead of the curve, but I'm also curious how the other big four are tracking? And then a couple of follow-ups on that?

William M. Greenman -- President and Chief Executive Officer

Yeah. Thanks, Mathew. Yeah, the Red Cross continues to be at the forefront with regards to their overall strategy for being compliant with the final FDA guidance document. So, I think that they will continue to be the front runner, just given their history of working with us. With regard to the remaining four of the big five blood centers, there's sort of a spectrum of preparedness on their part.

Certain blood centers are, I think, farther along than others and it really comes down to, are they sort of trying to determine what their blood centers will or their hospital customers will get, versus reacting to what the hospital demand is. And I think that really comes down to having a strategy by which you go to your hospital customers and say, we believe that pathogen reduction is our preferred option and here's the value proposition associated with the increased price relative to the other options that are put forth in the final guidance document.

Mathew Blackman -- Stifel, Nicolaus and Company -- Analyst

Okay. That actually lends itself well to the follow-up, which was, we do spend a lot of time talking about blood bank preparedness. But how are you guys specifically also approaching and engaging the hospital and customers? How are those conversations going? And you mentioned it, but are you still seeing the ability for blood banks to drive premium pricing with the platelet product?

William M. Greenman -- President and Chief Executive Officer

Yeah. I think again, going to the Red Cross as an example, just given how far along they are with regard to their overall platelet strategy. It really is a partnered effort between Cerus and the American Red Cross. We have a dedicated team that works with the America Red Cross, but on the hospital affairs side as far as bringing on board INTERCEPT platelets, discussing the value proposition with those hospital customers and why we believe there's an economic justification for increasing pricing, given the benefits conferred by pathogen reduction relative to the adoptions.

One of those being, increased platelet shelf life or earlier release of platelets and the ability to standardize the platelets components that a hospital will receive via fewer codes, thereby making it easier for hospitals to have a transfusion ready product. I think the central theme there is having a treated product versus tested product. And then we also have a deployment team that works closely with the America Red Cross, not only on the production side, as far as how quick they can ramp their INTERCEPT platelet production, but also the hand-off to the hospital customers.

Mathew Blackman -- Stifel, Nicolaus and Company -- Analyst

All right. And one last quick question. Any update on the number of approved BLAs in the US? And that's all I have. Thanks so much, guys.

William M. Greenman -- President and Chief Executive Officer

Yeah. Thanks, Mathew. I think we're still around 15, we've got 19 Red Cross blood centers that are using INTERCEPT out of their total 22. So really the overall BLA approval process is not rate-limiting at this point with regards to most of our key customers. And we don't expect it to be throughout 2020.

Mathew Blackman -- Stifel, Nicolaus and Company -- Analyst

Thanks again, guys.

William M. Greenman -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Jacobs Johnson of Stephens. Your line is open.

Jacobs Johnson -- Stephens Inc -- Analyst

Hey, thanks for taking the questions. Kevin, I think in the past you've given us some color around volume growth in the quarter. Clearly, a pretty standout quarter for product revenue, but I'd be interested if you'd share any sort of color about the volume trends you saw on the fourth quarter?

Kevin D. Green -- Chief Financial Officer

Yeah. So for the quarter kit volume was quite robust, if you compare that to Q4 of the prior year. Kit growth was up around 32%. For the full year, not too dissimilar, but close to 25%

Jacobs Johnson -- Stephens Inc -- Analyst

Got it. That's helpful. And then just Kevin, sticking with you. On the guidance for this year, can you just walk us maybe through the puts and takes of it. Particularly, it sounds like this will probably largely driven by US platelet kits, but does it assume any contribution from cryo, maybe toward the back end of the year? And then, any countries we should be aware of that are contributing to the guidance?

Kevin D. Green -- Chief Financial Officer

Yeah. So most of the growth -- the vast majority of the growth will be driven from US platelets. So that's not to say that there won't be growth in other areas, but relative to the growth that we're expecting from the US that will be modest. There is no cryo revenue modeled into our guidance. We do expect to submit in the first half of this year and assuming reasonable questions and response times could have approval by the end of the year. But we did not factor in any revenue into our guidance from cryoprecipitate.

Jacobs Johnson -- Stephens Inc -- Analyst

Got it. I leave it there. Thanks for taking the questions.

Kevin D. Green -- Chief Financial Officer

You're welcome. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Josh Jennings from Cowen. Your line is open.

Eric Assaraf -- Cowen and Company -- Analyst

Hi. This is Eric [Phonetic] on for Josh. Can you guys hear me?

William M. Greenman -- President and Chief Executive Officer

Yeah. We can.

Eric Assaraf -- Cowen and Company -- Analyst

Great. Just looking at your opportunity in Europe, what sort of contributions are you guys thinking could come out of Germany in 2020?

William M. Greenman -- President and Chief Executive Officer

Yeah. So, I think Germany continues to be somewhat of a slow ramp relative to what we -- similar to what we saw in the US. There are a lot of, what are called MAAs that are approved or in the process of being approved right now by the Paul-Ehrlich-Institute, which is the regulatory body that approves German blood centers to implement new manufacturing methods or I guess, essentially it's the -- blood products in Germany are regulators biologics by the pie[Phonetic], and so those are all coming together.

We do have hospitals -- sorry, blood center contracts that are in place and they're in discussion. And then, the mechanics of how the existing reimbursement that's in place actually translate into hospital payments to to blood centers for the product is something that we're working through today. So there is a dedicated Cerus team working on this. We are optimistic about the long-term opportunities that Germany represents, but in the context of 2020 guidance, it's not something that we think is going to be delivering meaningfully, it's more of a 2021, '22 event.

Eric Assaraf -- Cowen and Company -- Analyst

Great, thank you. That's very helpful. And then looking at the two Phase 3 studies you guys have ongoing for red blood cell. I think you previously mentioned a goal of having 10 sites up and running for ReCePI by year ends. I'm just wondering how progress on that goal has been? And then any comment on enrollment would also be helpful? Thanks for the questions.

William M. Greenman -- President and Chief Executive Officer

Yeah. So, as you mentioned, we have two Phase 3 studies that are enrolled in the United States. One is called RedeS and the other one is ReCePI. The RedeS study is enrolling really quickly and will continue throughout this year. So we're optimistic about enrollment in that study. And ReCePI enrollment is starting to ramp as well.

We have actually enrolled 10 plus sites in 2019 and are expanding the number of sites over the next several quarters. So with the additional sites that are coming on board, I think we're targeting more north of 15 for this year, we should see an increased pace of the environment for the ReCePI study in 2020.

Eric Assaraf -- Cowen and Company -- Analyst

Thank you.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the conference back over to Obi Greenman for any closing remarks.

William M. Greenman -- President and Chief Executive Officer

Thank you all for, again for joining us today and for your interest in Cerus. We will be participating in two upcoming investor conferences next month. First, we'll be at the 40th Annual Cowen Healthcare Conference in Boston next month. And we'll also be at the BTIG Snowbird, Utah Conference in March. We look forward to seeing many of you there in person. Thanks very much.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Timothy L. Moore -- Investor Relations Director

William M. Greenman -- President and Chief Executive Officer

Kevin D. Green -- Chief Financial Officer

Mathew Blackman -- Stifel, Nicolaus and Company -- Analyst

Jacobs Johnson -- Stephens Inc -- Analyst

Eric Assaraf -- Cowen and Company -- Analyst

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