Aug 1, 2019
Operator
Good day ladies and gentlemen, and welcome to the Cerus Corporation Second Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode.
Later, we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call will be recorded.
I would now like to introduce your host for today's conference, Lainie Corten. Please go ahead.
Lainie Corten
Thank you, operator, and good afternoon, everyone. I'd like to thank everyone for joining us today.
With me on the call are Obi Greenman, Cerus' President and Chief Executive Officer; Vivek Jayaraman, our Chief Commercial Officer; Kevin Green, Cerus' Chief Financial Officer; Carol Moore, our Senior Vice President of 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 June 30, 2019 and also describing the company's recent business highlights.
You can access a copy of this announcement on the company website at cerus.com. I'd like to remind you that some of the statements we'll make on this call relate to future events and performance rather than historical facts and are forward-looking statements.
Examples of forward-looking statements include those related to our future financial and operating results including our 2019 financial guidance and goals, operating expenses and gross margins, commercial development efforts, future growth and growth strategy, future product sales, product launches, the impact of current and future product 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 uncertainties 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-K for the year ended December 31, 2018 and our Form 10-Q for the quarter ended June 30, 2019, which we will file shortly. We undertake no duty or obligation to update our forward-looking statements.
And now it's my pleasure to introduce Obi Greenman, Cerus' President and Chief Executive Officer.
Obi Greenman
Thank you, Lainie and good afternoon. We are pleased to report another quarter of strong commercial execution, as we delivered our highest ever quarterly product revenue at $18.2 million.
Growth was fueled by increasing adoption INTERCEPT platelets, both in the U.S. and abroad.
Vivek will provide further detail later in the call. Based on this strong demand for INTERCEPT, we are raising our product revenue guidance range to $72 million to $75 million.
Kevin will cover the specifics in his prepared remarks. I'd like to share some recent evidence of the growing awareness and clinical acceptance of pathogen activation to help safeguard the blood supply, which we have seen since we shared on our Q1 on conference call -- since when we shared on our Q1 conference call.
In mid-May the FDA issued a final guidance document outlining strategies to reduce the risk of transfusion transmitted transfusion-transmitted-babesiosis. The babesiosis is transmitted by a microscopic tick borne parasite present in the Northeast and upper Midwest regions of the U.S.
Many individuals infected with the DZR are asymptomatic and their blood donations have been documented to transmit disease. The babesiosis guidance document requires blood centers to collect donations in 14 states in Washington DC to either test each donation for DZR using the FDA approved nucleic acid test, or to treat each one component with an FDA approved pathogen activation technology.
Recommendation applies to all three blood components and has a 12 month deadline for compliance. We think that the inclusion of pathogen reduction in this new guidance document underscores the overall utility of the INTERCEPT blood system.
The simplicity of having one intervention that can meet current FDA blood safety requirements, prospectively address the potential future threats from emerging infectious diseases and help maintain blood availability has a unique appeal. It can also potentially improve blood center logistics by minimizing the number of codes for blood components and the associated complexity of managing that inventory within blood centers and hospitals.
The recent AABB FDA liaison bi-annual meeting minutes posted on the AABB website provides several important observations. The minutes indicate that the FDA is actively working on several guidance documents in 2019, including a final version of the bacterial risk control strategies for platelets, which they note is due out this year.
In addition, the director of FDA Center for Biologics Evaluation and Research, participated in this liaison meeting and has also coauthored an editorial in the journal transfusion in June titled Towards Universal Pathogen Reduction of the Blood Supply. In this article the author has note the important role, the pathogen reduction can play as an alternative to traditional testing methods.
Thereby, can bring a greater assurance of safety, while potentially lowering costs due to the elimination of tests. The FDA continues to position pathogen reduction technology as a high priority for blood safety and availability, and as requested an increased budget to support continued research in this field.
As the market leader in pathogen activation, we are encouraged by this elevated level of engagement by the FDA and believe it will influence other regulators around the world and have implications for our global business over the mid to long-term. With that, let me turn it over to Vivek for an update on our commercial business.
Vivek Jayaraman
Thank you, Obi. I'm pleased to report that global adoption of INTERCEPT continues to ramp.
We believe INTERCEPT is becoming the preferred safety options as awareness of bacterial contamination of platelets increases, and the challenges associated with current bacterial detection strategies persist. As evidence, during the last quarter we experience strong demand for INTERCEPT kits in our Europe, Middle East and Africa region, as well as in the U.S.
As we stated previously, the U.S. platelet market is fairly concentrated, with the top five blood center network distributing approximately 70% of the total platelet supply.
We have contracts in place with all five of these large blood centers and are actively engaged with them to increase their production and distribution of INTERCEPT platelets. Of note, the American Red Cross is at the forefront in embracing pathogen reduction technology.
In fact, they had communicated broadly that pathogen reduction is a strategic priority for their organization. INTERCEPT is now being produced at 17 Red Cross manufacturing sites.
Furthermore, 13 of these sites have a BLA clearance, which allows them to ship pathogen reduced platelets across state lines. Red Cross hospital customers value INTERCEPT treated platelets give the compelling clinical and logistical advantages they infer.
For the Red Cross, pathogen reduction -- pathogen reduced platelets are an important contributor to restoring a sustainable blood supply. By allowing blood collectors to provide safe, effective blood products, while offsetting certain costs.
Once the FDA guidance is published we anticipate our engagement with the other major blood centers to increase as they seek to realize similar benefits and follow the American Red Cross. As Obi already mentioned, there are many reasons to expect issuance of a final bacterial safety guidance this year.
A recently released Department of Agriculture Appropriations Bill includes the statement that it has to be published during this FDA fiscal year, which ends September 30th. What’s most encouraging is that independent of a final guidance document, many blood centers and hospitals are proactively embracing pathogen reduction technology in order to be ahead of the curve and provide the safest possible product to their customers and patients.
In anticipation of the final guidance publication, we've been actively engaging the organization for a potential acceleration in guidance driven product demand. We are prepared to scale our efforts to meet customer needs of both the hospital and blood centers.
Historically, FDA guidance documents specified 12 month compliant period for newly issued guidance, which then requires all blood centers and hospitals in the U.S. to move expeditiously in order to meet the new standard.
Within such a timeframe, our focus will be on collaboration with our blood centers customers on their production ramp, or assisting hospitals in their conversion to use the pathogen reduced platelets. Much of this work has been underway for some time, and we have made strong progress.
Our growth story extends beyond the U.S. Last quarter we've been thrown year-over-year revenue growth in multiple countries.
International growth was driven by multiple factors and across several geographies. For example, we secured important wins in key strategic accounts, like the Dubai Blood Bank and Warsaw Blood Center [ph].
In addition, we witnessed the marked increase in customer interest INTERCEPT at the most recent International Society of Blood Transfusion Meeting in Basel, Switzerland. Furthermore, the recent GE Mark clearance for our INTERCEPT plasma kit with DEHP-free plastic will enable us to fulfill increasing customer demand for plasma, which is growing as INTERCEPT platelet adoption increases.
In summary, I continue to be very encouraged by the customer enthusiasm for INTERCEPT across the globe and we are committed to ensuring that our blood center partners and their hospital customers can offer patients the safest blood possible. Now, let me turn over the call to Kevin to provide an update on Q2 financial results.
Kevin Green
Thank you, Vivek and good afternoon, everyone. Today we reported second quarter product revenue of $18.2 million, an 18% increase compared to the $15.4 million reported during Q2 of 2018.
On a year-to-date basis, product revenue totaled $35.7 million, up to 23% compared to the $29 million reported during the first half of 2018. Though recent revenue growth has been strong, the underlying number of INTERCEPT platelet doses produced has been growing even faster.
One reason for the differential between the reported revenue and growth in demand is year-over-year changes in foreign currency exchange rates, which resulted in an FX headwind of approximately 6% compared to Q2 2018 reported revenues. French conversion to double dose kits is another factor.
And I'd like to share some statistics that demonstrate the true expansion we are seeing in INTERCEPT treated platelets being made available to patients. Global demand for INTERCEPT kits increased 23% during Q2 2019, compared to the prior year period, with the greatest percentage of growth coming from the U.S.
However, taking into account the French product mix shift to double dose kits, the calculated number of treated platelet doses increased approximately 40% during the second quarter compared to the prior year. We're looking at the first half of 2019 compared to that of 2018, worldwide demand for INTERCEPT kits increased nearly 30%, while the calculated number of treatable platelet doses increased by roughly 40%.
In terms of product mix sold during the quarter, platelet kit sales accounted for the majority of our reported product revenue at approximately 90%. Separately reported from our product revenue, government contract revenue during the second quarter totaled $4.3 million compared to $4.0 million during the prior year period.
On a year-to-date basis, government contract revenue was $8.7 million compared to $7.5 million during the 2018 period. Before discussing other second quarter financial results, I want to remind you that historically, we often see a seasonal impact to third quarter revenue, particularly in Europe, which slows down in the summer months, as potential blood donors head off for holiday.
Nevertheless, despite expected Q3 seasonality, and potential FX headwinds, the continued outperformance in our EMEA business, and the growing demand for INTERCEPT in the U.S. gives us confidence in raising our product revenue guidance to a range of $72 million to $75 million from our previous range of $71 million to $74 million.
This new guidance represents growth of approximately 18% to 23% over 2018. Now let's move the discussion to reported gross margins.
Gross margins on product sales for the quarter were 55% compared to 50% for Q2 2018. Year-to-date, gross margins were 54% compared to 48% during the first half of 2018.
These margin increases were primarily due to economies of scale we realized over the past six months, given the larger production levels year-over-year, which drove down costs on our kits sold. I'd now like to discuss operating expenses, which totaled $31.2 million during the quarter, compared to $24.3 million during Q2 of 2018.
Specifically, SG&A expenses during the quarter accounted for $16.7 million, compared to $14.4 million during Q2 of 2018. With the increased driven from investments made in manufacturing and quality oversight of production and preparatory investments in advance of the expected cryoprecipitate launch.
On a year-to-date basis SG&A spending during the first half totaled $32.9 million, compared to $28 million during the first half of 2018. Research and development expenses for the quarter totaled $14.4 million, compared to $9.9 million during the prior year.
The increase in R&D expenses was driven from increased costs for our Red Blood cell program, including BARDA related activities. Investments for our anticipated PMA supplements submission for pathogen reduced cryoprecipitate and label expansion for our platelet and plasma kits in the U.S.
On a year-to-date basis, R&D expenses totaled $27.9 million compared to $19.3 million during the prior year period. As clinical activities tied to our U.S Red cell program progress and accelerate, we expect R&D expenses to increase with a corresponding increase in BARDA funded revenue.
Net loss for the second quarter totaled $17.6 million or $0.13 per diluted share compared to a net loss of $13.3 million or $0.10 per diluted share for the prior year period. Year-to-date net loss was $36.4 million or $0.26 per diluted share compared to a net loss of $27.2 million or $0.21 per diluted share during the first half of 2018.
In terms of our balance sheet, we ended the second quarter with approximately $96.2 million of cash, cash equivalents and short-term investment on hand. During the quarter we began utilizing our revolving line of credit to finance investments in working capital, notably in inventory as we position ourselves to supply customers in advance of anticipated demand growth.
With that, let me turn the call back over to Obi.
Obi Greenman
Thanks, Kevin. Today I also wanted to provide an update on three key development projects, including INTERCEPT plasma, INTERCEPT red blood cells and pathogen-reduced cryoprecipitate.
It is an exciting time to be able to discuss these significant opportunities as they progress towards potential approval. First Vivek already noted the potential significance of a recent CE Mark approval for an intercept plasma kit with DEHP free plastic.
We plan a similar submission in the U.S. by year end and I have already heard an interest from hospitals who are converting to universal use of pathogen reduced platelets.
Second our CE Mark filing on INTERCEPT red blood cells is still under accurate review and we’re engaging frequently with our notified body the TUV and our competent authority the Irish Health Products Regulatory Authority and questions arising from our submission. We’ve already responded to and addressed a key subset of questions by the TUV and the dialog with the TUV around the new medical device regulation framework continues to be constructive as we transition from the medical device directive for our INTERCEPT red blood cells submission and for all of our products in 2020.
Further in the U.S our two active Phase III site studies for INTERCEPT red cells are continuing to enroll, with a number of additional study sites coming online through the end of the year. Finally, we continue to be excited about pathogen-reduced cryoprecipitate given the potential benefit for bleeding patients and the size of the market opportunity.
To help increase clinicians awareness about our cryo program over the past year we have participated in a number of conferences such as the Society of Cardiovascular Anesthesiologists, Society for Obstetric Anesthesia and Perinatology. Feedback from clinicians at these meetings on the utility of a five day broad crowd has been very encouraging.
We believe the business market opportunity for pathogen reduced cryo could be more than $200 million annually and potentially growing with the increasing use of coagulation monitoring in the hospitals. Owing to our FDA break through device designation we have been engaging with the FDA and the agency has been responsive, timely and helpful.
We been encouraged by the recent feedback that could both allow for improved production efficiencies and a potential label that allow final deliver dose specifications that are important to the transfusion physicians given the timing criticality for transfusion cryo. We're in the process of generating addition data to support our anticipated product label, which we think will allow us to meaningfully differentiate ourselves from conventional crowd that are looking forward to our expected U.S product launch in 2020.
Before I turn it back to the operator for questions, I want to remind everyone about our growth prospects that we outlined at our institutional investor meeting last October. At that time we provided a framework on how we plan to double our product revenue base from our existing product lines INTERCEPT platelets and plasma over four to five years, which translates into 15% and 20% compound annual growth.
We're well on our way to deliver on this goal given the 40% growth we reported in 2018 and with our increase guidance today that translates into a targeted 18% to 23% for this year. As we further ahead, we think our platelet and plasma product lines in North America and EMEA alone can translate into well over $100 million of annual product revenue.
New geographies and new product lines such as pathogen-reduced cryoprecipitate and INTERCEPT red blood cells add further to our growth prospects. In closing, I'd like to acknowledge the efforts of the Cerus team to make INTERCEPT the global standard of care.
The team at Cerus stands out in managing the multiple priorities required to transform transfusion medicine, while maintaining a focus on being a great partner for an expanding number of National Blood Services and large blood centers. With that, operator please open the call for questions.
Operator
[Operator instructions] And our first question comes from the line of Sung Ji Nam with BTIG.
Sung Ji Nam
Hi, thanks for taking the question and congratulations on the quarter. I just have a few quick questions.
First, the 13 American Red Cross sites receiving BLA clearance that pretty much constitutes all of the sites that are pursuing that the BLAs. Is that correct?
Vivek Jayaraman
All the manufacturing sites are receiving a BLA, so there are 17 sites that are currently manufacturing 13 of them have a BLA the other 4 are in process.
Sung Ji Nam
Okay. And then secondly, just curious about -- it sounds like the enrollment for the red cell trials are progressing nicely in the U.S.
Just trying to get a sense of when that kind of -- when you might see that ramping up? Is it -- do you think that could happen in the second half of the year?
I'm just trying to get a better sense of product revenue recognition for the remainder of the year. Or do you think that's something that would kind of ramp up more over in 2020 timeframe?
Obi Greenman
Thanks Sung Ji. I'll let Kevin handle the second part of that question.
We are seeing the two study sites enrolling at a faster clip with RedeS performing really well, recipe still has a number of sites to add throughout the remainder of the year. Kevin, do you have anything you want to comment about BARDA funding routing.
Kevin Green
Well, I think that's right. We do expect the increase as more sites and more patients are enrolling and that has kind of a cumulative effect.
So sites are not rolling off, just adding additional sites, so we expect it to go up.
Sung Ji Nam
Okay, great. And then just lastly, from me, in terms of the red blood cell review process in Europe, could you give us -- is there any update in terms of the timeline that you guys provided last quarter, and we'd love to hear any kind of additional thoughts there.
Thank you.
Obi Greenman
Yes, thanks, Sung Ji. So obviously qualifying a new GSH supplier is a top priority for us.
We're actually doing that at the moment. I just came out of a trip to Switzerland, meeting with one of those suppliers, we are really encouraged by their engagement and are looking to have the new GSH supplier founded by the middle of next year.
As far as the overall timelines for CD Mark approval, I think it's still a little premature for us to try and give a compressed timeline versus what we gave on the last call. But we are looking at multiple ways to try and compress that timeline.
Sung Ji
Great, thank you so much.
Obi Greenman
Thanks.
Operator
Thank you. And our next question comes from the line of Josh Jennings with Cowen.
Your line is now open.
Josh Jennings
Hi, thanks for taking the questions and congratulations on another record quarter. Just hoping to start off with just a couple questions on the U.S.
platelet franchise and with those five blood centers that represent 70% of volumes in the U.S. are you -- you have contracts with all of them, but is the revenue generation distributed evenly throughout those five, is it really driven by one or two just try to think about where you guys sit with those contracts?
And then how about all five of them make up the 70% have started to ramp up manufacturing facility you can speak to from a high level?
Obi Greenman
Yes, I think Vivek is best place to answer that question.
Vivek Jayaraman
Hey, Josh. As we had indicated in the past I mentioned earlier in the call, the American Red Cross really is leading the way and they've determined that pathogen reduction is the strategic priority for them.
So, they represent our single largest customer in the U.S. and certainly the largest of the take five, they're out in front in terms of securing the BLAs and some of rest.
The remaining four have all started the process of producing INTERCEPT and distributing the hospital customers and there are varying degrees in terms of the level of production. But of the five, the ARC, which is by far the largest name present about 40% of the market, they're out front in terms of intercept adoption.
Josh Jennings
Great, thanks, Vivek here. And I just -- one of the follow-up, I mean clearly the FDA bacterial risk guidance document is coming soon.
You guys have been ramping up manufacturing over last two years. Can you just give us an idea of where you are from a capacity standpoint and where you will sit in 2020.
In terms of handling the increased demand that we forecast will be there post the guidance document?
Obi Greenman
Yes, I think we're really in a good spot now with additional capacity coming online in 2020. I think some of Kevin's comments during the prepared remarks we're really focused on that as well, as far as getting our inventory in the right position to be able to take advantage of the guidance once it is finalized.
So I think all-in-all, we feel very confident on where we are going into 2020 and assuming some kind of 12 months compliance period.
Josh Jennings
Great. Just one last follow-up on INTERCEPT cryo, sounds like there's some burgeoning interest there within a couple societies and you had some constructive discussions with the FDA.
Can you just help us -- just work through just what are the next steps? And when should we be thinking about submission and potential approval just so we can think about when we can start seeing cryo revenues in the U.S.
in our models? Thanks a lot.
Obi Greenman
Thanks, Josh. So as I mentioned on the last call, there are some things that we're looking to do with regard to the product label.
We subsequently had a discussion with the FDA on these topics and so really love that discussion encouraged about what's possible to incorporate in the final level. Does require that we do some stability and sterility studies on -- going forward and the readout of that data will be sort of towards the end of this year and to early next.
So we're looking at a submission in the first half of 2020 with an approval in the second half of 2020. So I think it's -- we're still looking to see revenue contributions in the 2020 timeframe for the cryoprecipitate product.
Josh Jennings
Thanks, again.
Obi Greenman
Thank you.
Operator
Thank you. And our next question comes from the line of Jordan Abrams with Cantor Fitzgerald.
Your line is now open.
Jordan Abrams
Hi, guys. Thanks for taking the questions.
Guidance implies second half product growth of 18% at the midpoint, and -- which is below first half product growth. What are the reasons for the slowdown?
Is it just typical or conservatism? Thanks.
Obi Greenman
Kevin, you want to handle that.
Kevin Green
I mean, look, there's FX headwinds as we commented, which continue and we saw FX rates closer to the 114 level and were down to the 110 level. So we think that has the potential to persist.
I think, if you look at kind of the midpoint of our guidance. It would suggest roughly $19 million a quarter for Q3.
And for -- we certainly think they given the seasonality that we will be backend loaded, but still strong growth nonetheless.
Jordan Abrams
Great, thanks. And last we spoke you mentioned post GE Mark approval for red cells in Europe.
The new yield requirements would only require repackaging of clinical information that you already have. Is that still your believe or is there or is there a chance that you'll have to rerun any clinical trials?
Obi Greenman
I will let Caro handle the details here. I think we're confident with regard to the submission that we put in, but we never know what the ultimate questions will be.
So we are working through those questions, real time with TUV and, and we'll be doing that, so with ASPRA [ph]. But I think all-in-all, we feel confident about submission that we’ve put in and the data that’s in closing that.
Carol, any additional color on that?
Carol Moore
No, I think that's exactly right. We have a lot of data and we -- I think, we put it together in a convincing way.
We now just need to wait for those reviews and questions and I think we're in a good position.
Obi Greenman
Thanks.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Catherine [indiscernible] with Baird.
Your line is now open.
Unidentified Analyst
This is actually Tom Peterson on for Catherine. Thanks for taking the questions.
I think you guys mentioned last quarter on the conversion of the double dose kits in France. So just wondering, what's the mix in terms of the overall conversion are we looking at something like 50-50 or are we still ramping towards that?
Obi Greenman
Okay. Vivek, you want to handle that?
Vivek Jayaraman
Sure. We were estimating that exiting last quarter we’re at about at a 70-30 split between DS and single NSD for France.
So they've increased their DS conversion since we last reported. We think we're getting fairly close to steady state at this point.
But there are a few sites that need to continue the conversion.
Unidentified Analyst
Great, thanks. And then moving to Germany, maybe for a minute, do you see any contributions in the quarter?
I know you are expecting maybe some small revenue in the second half. But are you still expecting sort of that larger revenue contribution sort of kicking in, in 2020?
Vivek Jayaraman
Yes, we didn't see contributions from Germany in the quarter. As we mentioned before we anticipate Germany to start to kick-in on the top line towards the end of this calendar year with a real impact being noticeable in 2020.
We continue see good progress with securing marketing authorizations and continuing to get regulatory clearances. But we really view Germany as a 2020 growth story.
Unidentified Analyst
Great, thanks.
Obi Greenman
Thank you.
Operator
Thank you. And that does conclude today's question and answer session.
I would now like to turn the call back to Obi Greenman for any further remarks.
Obi Greenman
Thank you. Next month we will be participating in Baird's 2019 Global Healthcare Conference and Morgan Stanley's Global Healthcare Conference in New York.
Look forward to seeing many of you there in person. And thank you again for joining us today and for your interest in Cerus.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.
You may all disconnect. Everyone have a great day.