May 3, 2016
Executives
Lainie Corten - IR Obi Greenman - President & CEO Kevin Green - CFO Larry Corash - CSO Carol Moore - SVP, Regulatory Affairs & Quality
Analysts
Drew Jones - Stephens Josh Jennings - Cowen Thomas Yip - FBR Jeff Elliott - Baird
Operator
Good day, ladies and gentlemen. Thank you for standing by.
Welcome to the Cerus Corporation's First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only-mode.
[Operator Instructions] As a reminder, this conference is being recorded. Now, I would like to turn the call to Miss.
Lainie Corten, Investor Relations from Cerus. Please go ahead.
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 Financial Officer; Carol Moore, our Senior Vice President and Regulatory Affairs and Quality and Larry Corash, our Chief Scientific Officer. Cerus issued a press release today announcing our financial results for the first quarter ended March 31, 2016 and also describing the Company's recent business highlights.
You can access a copy of this announcement on the Company Web site at cerus.com. I would like to remind you that during this call we will be making forward-looking statements regarding the Company's expectations for its products, prospects and future results, including 2016 revenue guidance and related assumptions, expectations for and timing of future demand and revenue growth, operating SG&A and R&D expenses, sufficiency of cash, gross margins, mark-to-market adjustments, foreign exchange rates, customer implementation and the scope and timing thereof, U.S.
customer contracts, a potential CE Mark submission for and approval of the red blood cell system, and the potential related commercial launch and FDA guidance document and the timing and contents thereof and BLA submissions by U.S. centers.
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. I call your attention to the disclosure in the Company's SEC filings, in particular in Cerus' current report on Form 10-K filed with the SEC on March 09, 2016, under the heading Risk Factors.
This call will be archived temporarily on our Web site and will not be updated during that time. On today's call, we'll begin with opening remarks from Obi, followed by Q1 financial results from Kevin and then Obi will conclude with final remarks.
And now, it's my pleasure to introduce Obi Greenman, Cerus' President and Chief Executive Officer.
Obi Greenman
Thank you, Lainie. Good afternoon everyone.
I'd like to begin the call with an update on the recent events and progress in the U.S. As anticipated in March we received the FDA approval for INTERCEPT treatment of platelets suspended in 100% plasma, most blood donors in the U.S.
currently collect and store platelets in 100% plasma, so many of the centers we have under contract have been waiting for this new label claim in order to implement INTERCEPT. Another significant Q1 event was the release FDA's revised draft guidance document on bacterial safety of platelets.
In line with public feedback on the original draft guidance language, now revision now includes pathogen reduction as alternative to bacterial testing in order to satisfy the FDA's proposed standard for protection against transfusion-transmitted substance, the pathogen reduction is used during preparation of platelets, no further antibacterial safety steps are necessary by either the blood center or the hospital. In contrast the adequate safety via testing requires both, the early culture testing already performed by blood centers plus the addition of secondary testing starting at day four, we're already hearing increased interest in INTERCEPT as a result of the revised guidance and expect the interest will intensify as the 12 month implementation deadline becomes clear.
In parallel with these important developments we have continued to made steady U.S. progress in implementing the product and signing additional new contracts.
As of today, six customers are in routine production, supplying INTERCEPT platelets to hospitals in Florida, Delaware, Maryland, North Carolina and Puerto Rico. We expect the number of sites in production to grow rapidly through year end, especially now that our platelets and 100% plasma plan has been approved, within each site the volume of INTERCEPT production is driven by hospital demand as well as initially by how quickly a blood center can introduce the products across its potentially large customer base, sometimes numbering in the 100s of hospitals depending upon the size of the blood center organization.
The biologics license application or BLA process will also be an important step for centers with significant interstate distribution, the American Red Cross serves as the premiere example of an INTERCEPT customer with multiple manufacturing sites and broad U.S. distribution, through a process planning to go live at an initial manufacturing facility in Q2 followed by a phase rollout at up to six additional sites by the end of 2016.
With aggressive plans to pursue BLA licenses as quickly as possible, the Red Cross will use these sites to serve as the foundation for a potential nationwide distribution in 2017. Turning to more recent contracts, our preferred supplier agreement with blood centers of America is designed to streamline and reduce the contracting timeline for BCA numbers, Gulf Coast Regional Blood Center of Texas and Lifestyle Community Blood Centers of Florida were able to sign contracts for INTERCEPT in just a matter of days following the implementation of this master agreement, subsequent contracts have been signed with central Pennsylvania blood bank and Versity bringing the total number of BCA numbers under contract to 15.
Versity is a buying group representing blood centers of Wisconsin, Heartland blood centers, Indiana blood center and Michigan Blood, four blood centers collectively producing over 100,000 platelet units per year. In summary our U.S.
launch momentum continues with a number of significant milestones since our last quarterly call just two months ago. In the quarters ahead we'll be focused on getting our customers into production and building hospital demand for INTERCEPT together.
I will now turn the call over to Kevin for a summary of Q1 financial results.
Kevin Green
Thank you, Obi. This afternoon we reported Q1 revenue of $7.6 million comparable to reported revenue from the first quarter of 2015.
This was consistent with our belief that the major areas for growth will contribute in the second half of 2016. Give that most of our sales are still cellular eccentric reported revenues were slightly impacted by a more than 2% decline in FX rates.
With respect to the United States we retained a steady placement of Illuminators but continue to expect more meaningful top line contribution from U.S. early adopters in the second half.
As Obi mentioned earlier there was considerable Q1 progress in the U.S. and the organizations under contract or framework agreement collectively represented approximately 80% in the U.S.
market. Going forward we expect these U.S.
contracts will begin to contribute more substantially to our revenue. As we first install Illuminators and then begin to recognize kit revenue as blood centers move into routine production.
We will continue to be conservative about U.S. revenue projections until we gain further operational experience with our customers and better understand the potential impact of the Zika epidemic and the timing of the final FDA bacterial safety guidance.
Therefore we continue to expect annual global revenue of $37 million to $40 million. This assumes flat European, Middle East and Africa revenue with growth driven primarily by our U.S.
and emerging Latin America and Asia Pacific markets. Now turning from revenue to other Q1 results, gross margins for the first quarter were 44% compared to 39% in the first quarter of the prior year.
We are beginning to see the effect of our new manufacturing agreement which set fixed volume based pricing and removed the historical royalty we owed on kit sales. We continue to expect 2016 gross margins in the mid-40s expanding as our early adopter programs for the first U.S.
customers wind down. And turning now to operating expenses, total operating expenses for Q1 were $18.7 million compared to $17.3 million during Q1 of the prior year.
The increase in operating expenses were driven by higher SG&A costs incurred in support of our U.S. commercialization efforts, offset by lower accounting and other administrative costs.
Research and development costs are expected to be continued to grow to support label claim expansion and our post marketing studies in the U.S. and as we seek a potential CE Mark approval for our red blood cell product.
Net losses for the quarter were $16.9 million or $0.17 per diluted share compared to the losses of $9.5 million or $0.17 per diluted share in the prior year quarter. The reported net loss for Q1 2015 was positively impacted by non-cash gains of $6.3 million from the mark-to-market valuation of previously outstanding warrants.
We have no remaining outstanding warrants at this time and therefore we do not expect mark-to-market adjustments of this nature going forward. Now looking at the balance sheet, we ended Q1 in a strong position with cash and short-term investments of approximately $96 million compared to $108 million at the end of 2015.
Our cash balance continues to remain at a healthy level to service our projected operating needs for the foreseeable future and provide our commercial business with the resources needed to realize financial results from the current momentum. And now I’ll turn the call back over to Obi.
Obi Greenman
Thank you, Kevin. We've made a good start to the year with significant Q1 achievements in the U.S.
market. Though the earlier INTERCEPT adoption was led by smaller blood centers, the larger players are rapidly entering the market, both as the Zika epidemic and the revised draft FDA bacterial safety guidance document are increasing interest in INTERCEPT and changing how both blood centers and hospitals assess the value and urgency of pathogen reduction implementation.
We also are continuing to progress our red cell program preparing for our EU regulatory submission planned for the second half this year. In preparation for the projected launch in the second half of 2017 FERC and marketing initiatives has begun.
We're excited about the ability to provide our European customers a complete INTERCEPT portfolio across all three components for the first time. We also continue to evaluate whether the Zika epidemic has opened the door for any resources of federal funds that might accelerate our red cell program in the U.S.
The safety and availability of the U.S. blood in the face of the Zika epidemic is a topic that is garnering robust discussions related to the need for the INTERCEPT technology.
In conclusion, we expect 2016 will continue to be a dynamic year for Cerus positioning us to transfer dramatically in the 2017 and 2018 timeframe as hospital demand grows for INTERCEPT platelets and plasma in the U.S. and we potentially launched INTERCEPT red cells in Europe.
Operator, please open the call for questions.
Operator
Thank you. [Operator Instructions] And our first question is from the line of Drew Jones with Stephens.
Please go ahead.
Drew Jones
Question for you on the domestic Illuminator rollouts, if we think of the fact that you have got north of 80% of the domestic market under contract, what percentage placements of Illuminators do you have at this point?
Obi Greenman
We have 24 customers under contract right now and we haven't specifically sort of carved out how the Illuminators should be placed over there over the next couple of quarters, but I think what the metric I guess I was trying to guide you towards is number of blood centers that are routine productions, so we are now six this quarter and we expect that to grow meaningfully quarter-over-quarter through the remainder of the year.
Drew Jones
Have guys talked about what is the number of Illuminators that would take to cover the domestic market?
Obi Greenman
We haven't I mean I mean I think basically the throughput on these devices is pretty significant so theoretically a lot of these blood centers would only really require one typically from an operational standpoint two make sense just because of streamlines that our production especially when they go into routine. Some of the larger Red Cross sites might need additional beyond that, but really I think two per production site is a way of looking at it.
Drew Jones
Okay. And then as far as you touched on it Obi just as far as red blood cells domestically you touched last quarter on the potential for an IDE in Puerto Rico, can you give us a little more color on your conversations there and is there potential to expand beyond Puerto Rico if Zika becomes a problem in maybe Gulf States or something this summer?
Obi Greenman
I think that the overall approach is to see whether there is some kind of pathway to approval for the INTERCEPT red cell system that can be accelerated, and so those discussions are ongoing. I think what you have seen as the Department of Health & Human Services has provided funding for certain blood safety initiatives.
Specifically related to testing so far to address the Zika epidemic and concerns in Puerto Rico and beyond and in place like Florida and Texas that are also considering to deploy the Zika test under IDE. And so I guess all I can say at this point in time is that similar sort of discussions are underway with the blood safety authorities in the U.S.
as it relates to INTERCEPT.
Operator
And our next question is from the line of Josh Jennings with Cowen. Please go ahead.
Josh Jennings
And congratulations on all the momentum over the last quarter plus clearly a number of the announcements have should be catalyst to assume a demand across the board, but I was hoping to just ask about half of customer demand assuming you guys have gotten out to 80% of U.S. market under contract due to an increase in hospital customer demand, but any updates on color there and I think you've previously stated that you expect multiple hospitals so following on AHS example and spread to 100% INTERCEPT platelets over the course of this year, is that still on the table and is that any thoughts on the drive behind oncology centers converting to 100% platelets by the end of this year?
Obi Greenman
Maybe I fill the first part of that question and then I'll turn it over to Larry to maybe address some of the feedback you've gotten from the markets and specifically the hospital demand for INTERCEPT platelets from the hem/onc groups. And I think at a high level Josh we basically are seeing a number of hospital customers requesting INTERCEPT platelets certainly in the context of the FDA draft guidance because many of the blood centers are reluctant to incur the challenge I guess I would of doing blood culture plus an additional test at day four.
So we are seeing a number of hospital customers request to go to 100% INTERCEPT. Some of that will be driven by the work that we do with our blood centers under contract and sort of the collaboration we have in helping them build the demand.
And to some extent that will rollout I guess over the next several quarters as the blood centers are more inclined to start that outreach once they know that they can satisfy the demand from the hospitals. So that's one sort of progression I guess I would say as far as the adoption, but with that I'll turn it over to Larry because he's had some direct feedback from some of the hospital groups and specifically the hem/onc groups.
Larry Corash
We have been spending a lot of time talking to clinicians and particularly in the services that are high users of platelet components and in hematology, oncology sector both pediatric and adult, there is much more outpatient transfusion taking place today. And so the potential benefits that they have seen in Europe from lesser rates of transfusion reactions are very active to them, the fact that they don't have to worry about who needs a gamma irradiated product because everything is equivalent, in some pediatric centers the ability to replace, recruiting CMV negative donors is a very big factor for them and the opportunity to actually get out fresher platelets because of the bacterial quarantine goes away and avoid the secondary testing requirement which would fall on the hospital transfusion service, these are big drivers and many people have said to us that the logistics of pointed issue testing would literally be impossible for them.
For example in California, that test can only be done by a licensed medical technologist that's a high labor rate and not feasible 24/7 for these transfusion services. So, the hospitals are very aware of this and the impact that it will have on their services.
Josh Jennings
I think I’d like to follow up with just any update, I know it's still early days of the launch but on the transition time, and contracts signature by a blood center just operational implementation to hospital rollout, and I think don’t want to get ahead of myself but Puerto Rican experience with that one blood center in Puerto Rico that you got up and running within three days, so just wondering, if there's any incremental update on other U.S. centers?
Obi Greenman
I think, it really comes down to the sort of operations of the specific blood center, what we saw in the announcement today from Walter Reed, was I think they were able to get it done and implement it within a month of timeframe or so, so I think that's relatively quick based upon what they had to do as far as their current calling system and validation requirements, so it can vary, obviously if there is some urgency to it, they can move more quickly, I think what we're seeing with the Red Cross is that they're going to be very systematic about how they roll the technology out over this next several quarters.
Josh Jennings
Okay. And then lastly just the platelets and the 100% plasma level expansion, I was hoping you could just help us to think about directionally how early adopters and routine use, how will it translate with that little expansion into the percentage platelet with units that will become INTERCEPT platelets in some of these early centers over the next 12 plus months, should we be thinking about 50% of their volumes, 25% of their volumes, and anything directionally would be helpful?
Obi Greenman
Yes, I think it's hard because it varies by blood center and certain blood centers have sort of said that this is really that is much easier for us to carry a single inventory so we are going to go all in 100%, those are going to sort of assess hospital demand and fulfill the requirements of their largest hospital customers initially and so they would be carrying a mixed inventory. Specific to your question about platelets to 100% plasma, roughly half of the market is using the Trima apheresis collection platform and storing those platelets in 100% plasma and so that market is open to us now, I think the one thing we've seen with the approval, was that it was platform specific, so it was specific to how platelets are collected and so right now the current label claim is to platelets collected via the Hemacs platform with platelet added solution and for the Trima platform in 100% plasma and so we'll be endeavoring to sort of get the additional level claim extensions in over the coming quarters.
Operator
And our next question is from the line of Thomas Yip with FBR & Company. Please go ahead.
Thomas Yip
Just regarding labor extensions, beyond new labor extensions and also updated at the guidances on both on Zika and Black Plague do you see other factors that could drive in some implementation?
Obi Greenman
I think one of the strong drivers will be what the hospitals are demanding from their blood center providers and so to the extent that a hospital is requesting 100%, INTERCEPT treated platelet components to comply with the FDA guidance and their existing supplier is not able to do that that creates a competitive situation. So we'll see how we can support our blood center customers in that regard such that there is not a disconnect between supply and demand I think that will be an important driver for adoption but I think the other is that you already mentioned in your question are significant as well.
Thomas Yip
Can you also remind us any progress on the Phase IV PIPER post market study?
Obi Greenman
Yes, I mean I think I'll probably turn that over to Larry Corash again just because of his role here.
Larry Corash
Yes PIPER is actively enrolling in several centers now and being very well embraced the informed consent process has been streamlined in many of these centers and patients are happy to participate and have their data go into the PIPER study, so we're seeing very good acceptance.
Thomas Yip
Sure, so remind us that as different role as patients in the U.S. and sites that have implemented INTERCEPT, right?
Larry Corash
So, this is a cohort study with two cohorts in each center, the first cohort gives us baseline data with conventional platelet components, so we start with centers once we know they're going to be taking INTERCEPT, they start the conventional cohort and then while they're doing that in parallel we're setting them up to do the second cohort and we're also able to look at the patients that are in the first cohort and make sure that we get a balanced population in the second cohort. And this is working well with the logistics of those centers.
Thomas Yip
And final one, one very quick question, you mentioned earlier on six sites or blood providers are in routine production. Does that mean they are fully implemented INTERCEPT or is there another definition criteria to define them as routine production?
Obi Greenman
Yes, it is a good question, it doesn't mean that they're at 100% and so some of the sites have sort of mixed ways of how they collect platelets and so they're not yet able to go to 100%. And then also they are in a transition period, most of these and I think all the contracts actually are for platelets and plasma but most of the centers have started with platelets and then are not going to be moving to plasma.
So, they're not routine production yet for plasma.
Operator
And the final question is from the line of Jeff Elliott with Robert W. Baird.
Please go ahead.
Jeff Elliott
First one is on the first quarter revenue, it sounds like it was about in the range of that you expected it although it was below what myself and most of the consensus were looking for, I guess can you talk about is there, have you lost any business or did you really expect a flat growth in the first quarter? That's the first question I guess go ahead.
Obi Greenman
Yes, I think we sort of indicated that for the EMEA business that we expect the flat year as there were some potential opportunities throughout the year but then we weren’t going to factor that into our guidance and so this is as we've expected. And we I think basically didn't lose any market share that I'm aware of in the quarter.
I think that to competition, I think we did see certain markets were a little bit soft but we'd expect to see that pick up throughout the year.
Jeff Elliott
And then on the FDA label extensions I guess can you give us an update on timing for triple dosing in others, are they still on track?
Obi Greenman
Yes I think that the rigor that we've seen from the FDA review of the platelets and 100% plasma process. And the specificities of the collection platform have given us some additional information into how we sort of look at the sequence and the scope of the label claim extensions.
So, we are in the process of filing for the triple dose set submission in Europe this year. But have yet to sort of work through all the details for the various label claim extensions in the U.S.
although all the activities are underway with regard to the collection of data for those submissions and so those are underway just I think what we've seen from the platelets and 100% plasma approval is that the rigor of these reviews will acquire perhaps more data than we initially expected.
Jeff Elliott
And then one on the FDA draft guidance, I guess is there working assumption that everybody has, I guess use the blood centers and hospitals that, that's get finalized as written or are there still those holding out and you know it is final yet and then do you have any insight on when the guidance could be finalized?
Obi Greenman
I think I will answer the first part of that question I'll turn over to Carol Moore, head of regulatory here to answer the second part just around sort of what happens with these draft guidance documents as they move towards being a final guidance document. I think we were very happy with the languages as it came out, it was sort of consistent with what we saw, the feedback from the various blood centers and blood center organizations as far as their commentary and so we will be filing some comments to this revised draft but really in the context of clarifying language.
As far as the overall timing for sort of a final guidance document, perhaps Carol can address that.
Carol Moore
Yes, so the FDA set their discretion how they would like to proceed once they've issued draft guidance. There is a 90 day comment period and I think they like to take a look at the type of comments they are getting to see, if they've been on the mark with what they're trying to communicate but they do have the flexibility to determine when the draft should become final and how many of the additional comments they'd like to entertain.
So, that's a little bit -- we're still in the comment period, so it's a little bit unclear to us how many comments there might be the nature of those comments but it probably is a shorter process rather than a longer process since this is the second round of the draft.
Obi Greenman
I think that the last answer to your question would be what has the response has been from the market and I think it's been very-very strong, I think many of the hospitals see this as sort of a foregone conclusion and that they have to be compliant in the near term even before the draft becomes final. And they are concerned about how they can be compliant and asking their blood centers suppliers as to how they'll help them.
So we're really encouraged by the momentum we're seeing in the market and the demand coming from the hospitals.
Operator
And ladies and gentlemen this concludes our question-and-answer session for today. I will turn the call to Obi Greenman for final remarks.
Obi Greenman
Well, thank you all for joining us today. We look forward to updating you again on our Q2 call in early August.
Thanks very much.
Operator
Thank you for participating in today's conference. This concludes the program and you may all disconnect.
Have a wonderful day everyone.