May 1, 2012
Operator
Good day, ladies and gentlemen, and welcome to the Cerus Corporation First Quarter 2012 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn your call over to your host for today, Ms. Lainie Corten, Investor Relations for Cerus.
Ma'am, you may begin.
Lainie Corten
Thank you, operator, and good afternoon. I'd like to thank everyone for joining us today.
With me on the call are Obi Greenman, Cerus' President and Chief Executive Officer; Kevin Green, our Chief Accounting Officer; and Dr. Larry Corash, our Chief Medical Officer.
Lainie Corten
Cerus issued a press release today announcing Cerus' financial results for the first quarter ended March 31, 2012, and describing the company's recent business highlights. You can access a copy of this announcement on the company website at cerus.com.
Lainie Corten
I would like to remind you that during this call, we will be making forward-looking statements, including statements about forecasts of revenue and annual growth rate; commercialization progress; regulatory and governmental processes; the scope and timing of red cell trials and other research and development activities; prospects for CE Mark registration and other regulatory approvals; sales; operating expenses; gross margins; use of cash; finances; and business prospects. The company's actual results may differ materially from those suggested by forward-looking statements the company will be making, and the company assumes no obligation to update guidance or other forward-looking statements.
Lainie Corten
I call your attention to the disclosure in the company's SEC filings, in particular, Cerus' annual report for the fiscal period ended December 31, 2011, on Form 10-K, including the section entitled Risk Factors. This call will be archived temporarily on our website and will not be updated during that time.
Lainie Corten
On today's call, we'll begin with the company's financial results from Kevin, followed by Larry, who will give an update on our development program. We'll conclude our prepared remarks with commentary from Obi, who will review the recent quarter's achievements.
Lainie Corten
And now it's my pleasure to introduce Kevin Green, Cerus' Chief Accounting Officer.
Kevin Green
Thank you, Lainie. The total revenue for the quarter was $8.8 million, up 33% from Q1 of last year.
Product revenue represented $8.7 million, an increase of 41% year-over-year. Kit demand increased approximately 8%, compared to the fourth quarter of 2011 and represented approximately 95% of first quarter 2012 product revenue.
Kevin Green
Our first quarter results provide a strong start to meeting our 2012 guidance of $34 million to $36 million in product revenue. Average euro-dollar exchange rates for the first quarter were down almost 3% from the prior quarter, which is in-line with our expectation that 2012 may be impacted by a weaker euro against the dollar compared to 2011.
Kevin Green
As a reminder, we currently have an effective natural hedge to foreign exchange exposure. We sell most of our product in euro while also procuring the majority of our inventory in euro, and of course, maintaining our European sales force.
Gross margins on product sales during the quarter were 37%, compared to 43% during the same period in 2011. This quarter, we incurred high scrap charges, which were associated with the work-in-process issue first identified in Q4 of last year.
We believe we have captured the final charges associated with this incident. We're implementing a number of changes to our supply chain process to reduce the likelihood of encountering such high discard rate for our components going forward.
Kevin Green
As a result of these corrective actions, we expect our gross margins to improve, with increased production levels in alignment with expected revenue growth. In addition, we have several COGS-reduction initiatives currently underway with our contract manufacturers and expect to see the benefit of these as early as next year.
Kevin Green
Turning now to our operating expenses. Total operating expenses for Q1 2012 were $7.8 million compared to $7.4 million during the same period in 2011.
This year-over-year increase is a result of increased selling, general and administrative expenses associated with increased back-office support costs. Going forward, we expect operating expenses to modestly increase, driven primarily by increased research and development expenses as planned clinical trials commence to support CE Mark approval of the INTERCEPT red blood cell system.
Kevin Green
In addition, research and development expenses will be affected by the initiation of our planned Phase I and in vitro studies, which will support the planned Phase III clinical trial in the United States for the red blood cell system. In summary, operating expenses were reasonably consistent when comparing the first quarter of 2012 with that of 2011.
Kevin Green
By contrast, net losses were $8.8 million or $0.17 per share in Q1 of 2012, up from $5.1 million or $0.11 per share during the same period last year. It's important to note that the change in net loss was driven by a first quarter 2012 noncash charge of $4.5 million, compared to just $1.3 million for the same period in 2011.
These noncash charges relate to the mark-to-market adjustments of Cerus' outstanding warrants. In periods with share price escalation, such as we saw during Q1 of 2012, the implied fair value of the outstanding warrants increases, leading to noncash charges.
Kevin Green
Turning to cash. We ended the quarter with cash and marketable securities of $31.5 million, compared to $25.8 million at the end of 2011.
This increase was due in part to common stocks sold under the ATM for net proceeds of $9.2 million. Cash used for operations was $3.9 million, including investing $2.5 million in additional inventory.
Kevin Green
Now I'd like to turn the call over to Larry.
Laurence Corash
Thank you, Kevin. Today, I'll begin by giving an update on recent progress for our INTERCEPT red cell development program, starting with the United States and then moving to Europe.
Laurence Corash
In March, we submitted an investigational device exemption or IDE supplement to the FDA for our proposed Phase III chronic anemia trial protocol. As a reminder, this is the clinical protocol that FDA initially indicated could be reviewed under a Special Protocol Assessment, but later amended their position and requested submission under the IDE.
We have now received a response confirming that FDA will not complete their review of the Phase III protocol in advance of the prerequisite Phase I study data, which is not unexpected.
Laurence Corash
However, their response included detailed feedback on our proposed trial design indicating adjustments they would like to see in our next submission. We believe that we will reach agreement on a manageable study design and plan to refine the Phase III protocol in parallel with completing the Phase I study.
Laurence Corash
Regarding the Phase I study, we've initiated qualification studies at our 2 clinical sites. We expect to submit the protocol to FDA later this quarter and are targeting study initiation in Q3 following completion of our process transfer to each of the 2 sites.
This protocol is similar to that of our prior Phase I studies, and we estimate that the study will take approximately 12 months.
Laurence Corash
Turning to red cells in Europe. You'll recall that we planned to perform Phase III trials for the indications of acute and chronic anemia to support CE Mark registration.
For the acute anemia trial, we have completed a substantial review of the clinical trial application or CTA, and responded to questions. We are awaiting final regulatory clearance to start the trial.
Laurence Corash
We're targeting Q3 for initiation of this 50-patient study, which we expect to take approximately 12 months from initiation to completion. For the chronic anemia trial, we've started site initiation activities at 2 sites in Italy that have substantial populations of thalassemia and/or sickle cell anemia patients.
We're preparing a CTA for this trial that we plan to submit to Italian regulatory authorities in Q3. As we mentioned previously, we will propose an approximately 50-patient design, which we anticipate will require about 2 years to complete.
Laurence Corash
I'd like to give a few quick updates on our other programs. At the American Society for Apheresis, we presented data on the French experience with INTERCEPT plasma to treat TTP, demonstrating high levels of efficacy and safety compared to conventional plasma.
As you recall, thrombotic thrombocytopenic purpura is the same clinical indication for which we received Orphan Drug Designation in the United States.
Laurence Corash
This French study served as a pilot for a larger prospective study that we're planning with the French national study group for microangiopathies in support of our plasma Orphan Drug program. Another presentation of interest occurred at the International Haemovigilance Seminar, where the EFS Alsace presented data demonstrating that there had been no cases of transfusion-related sepsis with INTERCEPT platelet components in 6 years of use with 104,000 transfusions.
In contrast, they reported that regions in France using conventional platelets continued to report transfusion-related sepsis.
Laurence Corash
Finally, at the same conference, the Swiss regulatory authority, Swissmedic, presented independent data confirming successful implementation of the INTERCEPT Blood System for platelets in all 30 regional blood centers. In addition, the presentation showed a reduction in severe transfusion reactions based on their experience after transfusion of 26,500 INTERCEPT platelet components.
These data reinforce the value of the INTERCEPT technology to improve patient outcomes.
Laurence Corash
I'd like to turn the call over to Obi.
William Greenman
Thank you, Larry. I would like to begin by reviewing progress on our 4 major goals for 2012, which are: to deliver on our annual revenue guidance; to continue the global expansion of INTERCEPT markets; to initiate acute and chronic anemia Phase III trials in Europe; and finally, to make progress towards INTERCEPT approvals in the U.S.
William Greenman
We expect approximately half of our 2012 sales growth to come from existing customers as a result of the full year effect of customers who began using INTERCEPT in 2011 and from existing platelets or plasma customers who began using both products. The other half of the growth is expected to come from new customers such as centers in Saudi Arabia and Austria, that we recently announced had become our first platelet customers in those countries.
William Greenman
The $8.7 million in sales revenue in the first quarter provides a strong start towards meeting our $34 million to $36 million sales guidance for the year. We also focused on acquiring additional regulatory approvals, distributors and customers outside of Europe and the Middle East.
William Greenman
In that respect, INTERCEPT is now represented by distributors in Australia, New Zealand, Malaysia, South Africa, Mexico, Brazil and Chile. And today, I'm happy to report that we have received confirmation of the first use of INTERCEPT in Latin America.
A center in Chile has started using INTERCEPT to treat a modest number of platelet units each month. While this doesn't yet represent a meaningful contribution to our annual revenue, we believe it is still a significant event.
These markets will take some time to develop, but in the future, they can provide us with a diverse customer base across the globe.
William Greenman
Turning now to our INTERCEPT red cell program. I'm encouraged by the continued progress that we have achieved, both in Europe and in the United States.
Initiating both our Phase III studies in Europe and our new Phase I study in the U.S. are important milestones for 2012.
William Greenman
The constructive feedback that we have received from the FDA brings us another step closer to a final protocol for the Phase III U.S. red cell trial.
We continue to believe that our steady progress towards the European launch of the red cell system and the U.S. approval for INTERCEPT are as important to Cerus as growing our platelet and plasma markets.
William Greenman
Before concluding, I would like to provide a few remarks regarding the new collaboration that we've announced in the past week. Our red blood cell collaboration with the New York Blood Center provides us an opportunity to participate in the creation of a potential next-generation red cell product, leveraging the INTERCEPT technology and our strength in scientific research and development.
William Greenman
We also believe that the close relationship with this major U.S. blood center will be valuable as we look ahead to one day launching products in the United States.
The NYBC is regarded as one of the leading transfusion medicine research centers in the world.
William Greenman
Our recent collaboration with the Swiss Red Cross and the University Hospitals of Geneva reflects our strongly held belief often shared by our customers that we have an obligation to bring pathogen activation to Africa, where the blood supply is challenged by both a higher sense of transfusion transmitted diseases and a shortage of available blood. These blood safety and availability challenges often impact the most vulnerable of patients like those with internal hemorrhage.
William Greenman
We hope to develop a low-cost disposable set that requires the bare minimum in blood center or hospital infrastructure to operate. In conclusion, this was a strong quarter for Cerus, with the disposable demand up 8.3% from the previous quarter.
We remain confident with our 2012 guidance and look forward to updating you on our next quarterly report.
William Greenman
Operator, I would like now to open the call up for questions.
Operator
[Operator Instructions] And our first question comes from the line of Scott Gleason from Stephens.
Trey Cobb
It's Trey on for Scott. Just a couple questions.
One, on the high scrap cost in the quarter, can you give us any color on kind of what that impacted the gross margin?
Kevin Green
Sure. So, Trey, as we talked about, I think, last quarter, we had experienced a high discard rate for a certain component beginning in Q4.
Our analysis of that particular lot of the component resulted in the charges that you saw at the recent quarter, which impacted margins by about 5%. Since first discovering this, we've been working with our manufacturer and have subsequently been manufacturing this particular component, and we're pleased with the result, both in quality and consistency of that component and believe that this issue is largely behind us.
Trey Cobb
Okay, great. And then we've obviously seen you guys expand your geographic presence with recent announcements in Middle East, Austria, et cetera and then, I guess, Chile today.
Could you maybe talk a little bit about what you're seeing in the pipeline and how you see some of the recent awards trending in terms of contribution?
William Greenman
Trey, I think that we've realized that blood safety is obviously a very big issue in a lot of these other countries around the world, and specifically due to various pathogen-borne [ph]diseases. But just in general, the challenge of maintaining the safety and availability of the blood supply in parts of the world where they have a high incidence of transfusion transmitted disease.
So I think that our focus is to create sort of a portfolio of opportunities that will mature at various rates, but will allow us greater consistency with regards to delivering on revenue growth. And to answer your other question, I think that -- we sort of factored this into our guidance for the year, having a number of opportunities that would occur throughout the year.
So we're not changing our guidance today, but we're optimistic about the trajectory for the year.
Trey Cobb
Okay, great. And then one more, and I'll hop back in the queue.
Has anything changed in France? I know they were having issues with their own facility in terms of, I guess, your market share there.
Has anything fundamentally changed from 4Q?
William Greenman
Yes, as we reported on the fourth quarter, we were close to a 60% market share at the time, and we're a little bit less than that now, about the same. So I don't see -- there's been no material change quarter-to-quarter.
But as you may recall, they did have the withdrawal of the methylene blue product, and so some of the market share is attributed to their ability and stocks of plasma and making sure that they can have a sufficient inventory of pathogen-activated plasma. Going forward, we have indicated that we believe that the French would like to be less dependent on a single supplier and would like to leverage their facility in Bordeaux.
But obviously, this is sort of a quarter-to-quarter process, and so the best we can do right now is update you on the next call as to what our market share is for the second quarter.
Operator
Our next question comes from the line of Matt McAvennie [ph] from Robert W. Baird.
Unknown Analyst
Actually 2. First, I was just wondering, on the U.S.
RBC program, can you maybe provide a little more color on why the FDA amended its position on the SPA?
William Greenman
Larry, do you want to go in and cover that?
Laurence Corash
Sure. It's really a legal administrative position.
The review group and OBRR indicated to us on 2 separate occasions that they could use the SPA route, and ultimately discovered that they do not have the legal authority to use that route.
Unknown Analyst
Okay, got you. And then, I guess, just following up.
I think I'm not sure I heard this correctly, did you say the kit demand -- quarterly kit demand was up 8.3%?
William Greenman
Yes.
Kevin Green
Yes.
Operator
Our next question comes from the line of Caroline Corner from MLV.
Caroline V. Corner
Just a couple of quick ones from me. First of all, with regard to Saudi Arabia, you said that the immediately addressable market there with your new agreement is about $0.5 million a year, but the total market is $6 million to $8 million.
Can you talk a little bit about how things work essentially in Saudi Arabia for you to get into those other facilities out there?
William Greenman
Yes. So we use a distributor for Saudi, and I think as we alluded to in our press release, that, that site that we just got the tender award for is with a very prominent site in transfusion medicine in the region.
It was a reference center within Saudi Arabia. So we're hopeful that their implementation will influence sort of the state-of-the-art for blood safety in the Saudi kingdom.
Going forward, I think that it's likely that we're not going to see meaningful revenue contributions from the other sites until 2013, but certainly we're in discussions with a number of customers at the moment.
Caroline V. Corner
Okay. And then the placements you had in Russia at the end of last year, are you seeing much adoption there?
Are they using those Illuminators that were placed?
William Greenman
Yes, they are, and I think it's important to note there, though, that the purchasing patterns there differs relative to Western Europe in that typically, they don't go
William Greenman
[Technical Difficulty]
William Greenman
The phone line went down on us. So anyway, so the -- we are seeing increased purchasing from Russia as a function of the Illuminators that were purchased, but it's definitely not a sort of a predictable pattern of purchasing.
Caroline V. Corner
Okay. And then my last one regarding the German region, the Ba-Wü region.
Has the data collection started? Do you know -- I know that's not a Cerus-sponsored trial, but there's a possibility there to generate some data that could lead to more adoption down there.
Do you know if that trial is underway or that collection of data has started yet?
William Greenman
That trial is not underway yet.
Operator
[Operator Instructions] And I am showing no additional questions in queue. I'd like to turn the conference back over to management for any closing remarks.
William Greenman
Well, thank you for joining us today. We look forward to updating you in late July for our next quarterly call.
Thanks very much.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect.
Have a great rest of the day.