Aug 4, 2020
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Cerus Corp Q2 2020 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].
I'd now like to turn the conference over to Tim Lee, Investor Relations Director. Please go ahead.
Tim Lee
Thank you, operator, and good afternoon. I'd like to thank everyone for joining us today.
As part of today's webcast we are simultaneously displaying slide that you can follow. You could access the slides from the Investor Relations webcast at www.cerus.com/ir.
With me on the call are Obi Greenman, Cerus' President and Chief Executive Officer; Dr. Nina Mufti, Cerus's Vice President, Development, and Red Blood Cell Program Leader, Kevin Green, Cerus' Chief Financial Officer; Vivek Jayaraman, Cerus's Chief Operating Officer; Dr.
Laurence Corash, our Chief Scientific Officer; and Carol Moore, our Senior Vice President of Regulatory Affairs and Quality. We issued a press release today announcing our financial results for the second quarter ended June 30, 2020 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 like to remind you that some of the statements we will make on this call related to future event and performance, rather than historical facts and are forward-looking statements.
Examples of forward-looking include those related to our future financial and operating results, including 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 of 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 could 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, and our Form 10-Q for the quarter ended June 30, 2020 for 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 Greenman followed by Dr. Nina Mufti, who will provide an update on Red Blood Cell program, Kevin Green will then review financial results.
And finally, Obi will provide closing remarks. And now, it's my pleasure to turn the call over to Obi Greenman, Cerus' President and Chief Executive Officer.
Obi Greenman
Thank you, Tim, and good afternoon. I'm pleased to report our highest quarterly highest quarterly product revenue performance today at $21.5 million despite the Q2 challenges posed by the COVID-19 pandemic.
These results are evidence to the resilience of our business during this time and the essential and growing role that pathogen inactivation plays in helping secure the supply chains for blood safety and availability. Dedicated team at Cerus is also shown a great ability to adapt.
I am grateful for their foresight and the crisis management planning that has allowed us to support our blood center customers throughout this period and also to help them initiate multiple COVID-19 convalescent plasma programs at the same time. The record product revenues in the quarter were driven by robust year-over-year platelet kit sales growth in the U.S.
coupled with strong plasma and illuminator sales increases in EMEA region. In the U.S.
with the March 31, 2021 deadline for compliance with FDA guidance on platelet safety, now less than eight months away, the U.S. commercial organization continues to focus its efforts on helping our blood center customers and their hospital clients to meet the deadline.
The American Red Cross, the largest blood provider in the U.S. continues to lead the transfusion medicine field board [ph] with approximately 25% of their platelets now being INTERCEPT treated.
20 of the 23 Red Cross production sites are producing INTERCEPT platelets. Finalizing their strategies for bacterial safety guidance compliance remains their priority for U.S.
blood centers despite the recent challenges of the COVID pandemic. Just recently the Red Cross officially notified all of its hospital customers of its goal to convert to 100% pathogen reduce platelets.
In preparation, the American Red Cross is directing all customers to begin updating their IT systems now to accommodate INTERCEPT treated platelets. With this step alongside offering and interim bacterial testing option, the Red Cross is positioned to provide platelets compliant with the FDA guidance requirements to all customers by the deadline of March 2021.
The four other large blood center customers in the U.S. that and combination of the Red Cross collectively represent 70% to 75% of the overall U.S.
blood supply are all currently produce INTERCEPT platelets and had acknowledge that INTERCEPT is the preferred method to comply with the FDA guidance document. As a reminder, the overall market opportunity in the U.S.
for INTERCEPT platelets is approximately $150 million per year. Our goal is that INTERCEPT becomes a Standard of Care for platelets in the U.S.
and we aim to capture as much of this opportunity as possible during the next few years. One of the key factors that could drive even faster INTERCEPT uptake, the extension of the shelf life for INTERCEPT platelets from five days to seven days.
This label claim already exists in other countries including France and Switzerland where the operational benefits and ease-of-use have been solidly documented and INTERCEPT is used for 100% of the platelet supply. If we continue to make progress on the recovery and survival study necessary for a planned FDA submission for a day seven shelf life on INTERCEPT platelets.
The submission is target by the end of this year or early next, we anticipate possible FDA approval for this seven-day claim in mid-2021. In the context of the FDA guidance for platelet safety potential for a day seven claim combined with the pandemic preparedness facilitated by pathogen reduction strongly favors the choice of INTERCEPT for both blood centers and hospitals.
The security afforded by treating platelet units versus just testing them is a simple concept that resonates well during the COVID crisis. The need for coronavirus convalescent plasma and the desire to pathogen inactivated, help drive plasma kit sales and new customer illuminator placement in EMEA which helped fuel a solid Q2 performance in the region.
We think the illuminator placement in the quarter bode well for additional kit sales downstream. While uncertainty about the COVID-19 impact on the global healthcare systems and economy persist in the second half of 2020, we are confident in our ability to deliver on our guidance of $89 million to $93 million in product revenue this year.
Looking beyond EMEA, we're excited about our recently announced a five-year contract with the Hong Kong Red Cross for INTERCEPT platelets. The Hong Kong Red Cross is a member of the influential Asia-Pacific blood network and a key opinion leader globally.
This is a very strategic account and represent an important beachhead for Cerus to expand its presence in Asia-Pacific. In the coming quarters, we look forward to sharing with you our expanding initiatives and APAC.
In parallel with our commercial activities our product pipeline continues to advance and positions as well to sustain our revenue growth going forward. As previously announced the PMA supplement application for pathogen reduced cryoprecipitated fibrinogen complex was submitted to the FDA at the end of May.
Given the 180-day review clock on PMA supplements, we believe pathogen reduce cryoprecipitated fibrinogen complex, or pathogen reduce cryo could receive FDA approval as early as the end of this calendar year. With the potential approval now less than five months away, we've expanded our prelaunch preparation including incremental hires to the therapeutic team that will lead our commercialization efforts.
We continue to be excited about the launch because of the potential clinical benefit for bleeding patients and the size of the overall market opportunity in the U.S. We are also on track to submit for a new technology add-on payment or NTAP with CMS in October to further support the economic utility of our pathogen reduce cryo product at the hospital.
A possible receipt of the NTAP in 2021 could expand access of pathogen reduced cryo to bleeding patients subsequent to the launch and thereby accelerate overall product adoption. Let me now turn over to Dr.
Nina Mufti to provide a clinical and regulatory update on our red blood cell program, which remains our single largest opportunity given the volume of red cells transfused globally. Red cells are the most frequently transfuse blood component and we are the only company in the world developing a pathogen activation system for red cells, and correspondingly the only company with a full pathogen activation.
Dr. Mufti has been with Cerus for 13 years and has been our Vice President of Development since 2012.
During her tenure, she oversaw the program development for the PMA submission at subsequent FDA approvals for both INTERCEPT platelets and plasma. With the increasing importance of the red cell launch, we appointed Nina to lead the INTERCEPT red cell team with two main goals; progress the CE Mark approval and product launch and advanced to a PMA submission for the red cell product in the U.S.
Nina Mufti
Thank you, Obi. I'm pleased to provide an update on our red blood cell program.
As many of you are aware of the development pathway for the program has not been easy or straightforward, but we've made solid progress on the development pathway to bring the product to market. Recent achievements have been the combined work on various chemistry, manufacturing and control activities, including the qualification of new glutathione supplier and establishing clarity around the clinical approval pathway.
Recent discussions with European and U.S. regulatory agencies have provided clarity on pathways to registration.
Let's start with Europe, where our CE Mark application will be reviewed under the new Medical Device Regulation or MDR. pathway.
We are transitioning our submission made under the Medical Device Directive or MDD to the MDR this year. Although there has been a recent one-year extension for submissions under the MDR moving to May 2021 due to COVID-19.
The duration of our review process under the MDD would exceed the May 2021 date. As a result, was submitted our MDR pre application to TUV, our notified body in June 2020, and gained agreement on a modular submission process consisting of four separate modules.
We plan to submit modules one and two of our CE Mark application under the MDR pathway by the end of Q3 2020. The first two modules consists of both the clinical and non-clinical safety data, as well as the data for in vitro RBC quality and pathogen inactivation efficacy.
Module three, which includes the chemistry and manufacturing control data for the active substance, Amotosalen and the quencher used in the inactivation process, glutathione is targeted for submission in Q2, 2021. This module will include the qualification data from our new glutathione supplier, in addition to TUV module three will also need to be reviewed by the Irish Health Product Regulatory Authority or HPRA, or competence authority for this submission.
HPRA review process is a minimum of 210 days and will define the timeline for approval. The fourth and final module which contains information on the manufacturing of the processing and filter set and final packaging is planned for submission at the end of Q2 2021.
Based on the anticipated review timelines by both TUV and HPRA, we expect the CE Mark approval for INTERCEPT red blood cells in 2022. Switching to our U.S.
red blood cell program, we recently met with the FDA to discuss the chronic transfusion study requirements for a PMA submission. During that discussion, we proposed expanding our current regular study to include patients who receive multiple RBC transfusions to support a chronic anemia indication for the product, rather than conducting additional standalone Phase 3 study that's previously planned.
The agency agreed to this approach, thereby shortening the timeline to obtain data in patients that received multiple RBC transfusions. As a result, we submitted our revised protocol for the study to the FDA, and are in discussions with BARDA to fund this protocol expansion.
Despite the impact of COVID-19 on the red cell U.S. clinical trial program, we are working with our clinical trials sites to reestablish enrollment plans, through the remainder of 2020 and into 2021.
We will share updates on the overall PMA submission scheduled later this year. In summary, with a clear CE Mark roadmap and alignment with the FDA on the clinical trials requirements for chronically transfused patients required for a PMA submission.
Our efforts to commercialize the INTERCEPT red blood cell system in the European and U.S. markets remain on track.
With the renewed focus on pandemic preparedness by government officials, we look forward to offering the full INTERCEPT portfolio to our blood center customers. Let me now turn it over to Kevin for an update on the second quarter financials.
Kevin Green
Thank you, Nina. And good afternoon everyone.
As Obi mentioned earlier, we posted record product revenue during the second quarter, totaling $21.5 million. This represents an 18% increase compared to the $18.2 million reported during Q2 of 2019.
Foreign currency exchange rates negatively impacted reported Q2 sales by approximately 1%. On a year to date basis, reported product revenue totaled $40.1 million, up 12% compared to the $35.7 million reported during the first half of 2019.
Foreign currency exchange rates negatively impacted reported year to date sales by approximately 1.5%. While others continue to grapple with the dynamic impact of the COVID-19 pandemic, the INTERCEPT business has remained resilient.
We certainly saw some unusual inventory management and demand from blood centers during Q2, with certain customers choosing to bring down there existing platelet inventory while accelerating their use of plasma sets in part for SARS-CoV-2, convalescent plasma. As such, the total number of kits sales was up on a global basis.
While the calculated number of treatable platelet doses shift was essentially flat during the quarter. Looking ahead, we expect that the platelet business will be the primary growth driver for the balance of the year.
Although we may see continued interest on our plasma kits, compared to our previous expectations. For the year, the calculated number of treatable platelet doses and the number of kits sold have increased 6%.
To illustrate the Q2 dynamic, platelet kits accounted for approximately 82% of total kit sales, while plasma sales accounted for approximately 18%. In recent quarters, the mix was closer to 90/10.
Government contract revenue in support of our BARDA collaboration is reported separately from our product revenue and totaled $5.3 million during the second quarter, compared to $4.3 million during the prior year period. On a year to date basis, government contract revenue was $11.4 million compared to $8.7 million during the 2019 period.
Now let's move to our reported gross margins. Gross margins on product sales for the quarter were consistent for both Q2, 2020 and 2019 at 55%.
On a year to date basis, gross margins were 55% compared to 54% during the first half of 2019. We saw offsetting factors in our gross margin composite during both Q2 and for the year to date basis, with volumes and foreign exchange rates providing an improvement, offset by product mix, namely increased plasma and illuminator sales.
Turning now to operating expenses. Operating Expenses totaled $31.7 million for the quarter, compared to $31.2 million for Q2 of 2019.
On a year to date basis, operating expenses totaled $63.5 million compared to $60.8 million for the first half of 2019. Specifically SG&A expenses during the quarter accounted for $16.1 million, compared to $16.7 million for Q2 of 2019.
A key driver of which was a slowdown in travel and conference attendance during Q2 as a result of the shelter in place experienced during the quarter. We are also seeing continued leverage with our commercial [Indiscernible] driving revenue growth without incurrence of additional cost.
Similarly, on a year to day basis, SG&A spending totaled $32 million, compared to $32.9 million during the first half of 2019. Research and development expenses for the quarter totaled $15.6 million compared to $14.4 million during the prior year.
The higher R&D expenses were revenue by increased activity for the U.S. red blood cell program supported by BARDA, work on our triple set configuration and extended shelf life for our U.S.
platelet product, as well as development efforts on a next generation illuminator. Year to date, R&D expenses totaled $31.4 million, compared to $27.9 million for the prior year period.
Net loss for the second quarter total of $14.9 million or $0.09 per diluted share, compared to a net loss of $17.6 million, or $0.13 per diluted share for the prior year period. Year to date net loss was $31.3 million or $0.19 per diluted share, compared to a net loss of $36.4 million or $0.26 per diluted share during the first half of 2019.
In terms of our balance sheet, we ended the second quarter with approximately $136.5 million of cash, cash equivalents and short term investments on hand. Given our current expectations and guidance, we continue to believe 2020 cash use from operations will be in the $50 million to $60 million range, with $27.6 million already recorded during the first half of the year.
With that, let me turn the call back over to Obi.
Obi Greenman
Thank you, Kevin. As you can tell from our comments today, our top line pipeline, and the bottom line results are progressing in the right direction despite the ongoing pandemic.
We are increasingly excited with how we are positioned for continued revenue growth as a function of the required compliance with the FDA guidance on platelet safety. From a global perspective, the inherent value and a proactive approach to blood safety over the historically reactive testing strategy has taken on new significance with our customers.
The challenges of rapidly developing assets for SARS-COV-2 that are sufficiently sensitive and specific, has illustrated the fundamental weakness of the current blood testing paradigm to secure blood safety against emerging infectious disease threats. It is a same testing paradigm that requires three different assays to ensure blood safety against just Hepatitis B alone, plus another two different assays each that are required for both HIV and Hepatitis C.
And even with this strategy of multiple redundant tests, there remains a concern about window period transfusion transmitted infections, when blood donors are still infectious, but the test cannot detect the viral pathogen in their blood. In July publication in the American Society of Hematology Journal Blood raises some new concerns about the sensitivity of current blood screening assays for HIV during the era of rapidly growing use of HIV pre exposure prophylaxis or prep and anti retroviral therapies.
The possibility that these blood donors are not identified by current tests to prevent HIV contaminated blood products from entering the blood supply highlights the critical role that INTERCEPT can and already does play in creating a proactive blood safety paradigm. Whether it is protecting against emerging infectious disease threats like chikungunya Zika and now SARS-COV-2 or addressing the gaps in the current testing and donor deferral paradigm, INTERCEPT provides a global solution for a global unmet need.
During the coming months with this pandemic apparent to increase in the U.S. and globally, Cerus will continue to focus on ensuring that we are able to support the current and future growth of our business, while at the same time readying ourselves for two key product launches.
Operator, please open the call for question.
Operator
Thank you. [Operator Instructions] And our first question comes from Matthew Blackman from Stifel.
Your line is now open.
Matthew Blackman
Hi. Good afternoon, everyone.
Thanks for taking the questions. Maybe, Obi, to start.
Appreciate the color on U.S. adoption at the Red Cross.
Now it -- I think you said 25% INTERCEPT platelet mix. Can you just remind us where the Red Cross would say at the end of 2019 just to get a sense of the ramp?
And any color on where the other big four blood banks are today?
Obi Greenman
Yes. I think, Vivek joined us on the call today.
So given his area of responsibility as a commercial operations in the U.S., I'll let him answer that question.
Vivek Jayaraman
Sure. Hey, Matt, thanks for the question.
I hope all's well on your end. We -- the ARC has been climbing pretty steadily really since even before the guidance was finalized.
If you recall, they made the decision to go to 100% PR independent of guidance. So they're out ahead relative to the other four.
But we've led -- five. Customers needs to call these five blood center families in the U.S.
account for about 70% of nationwide distributions. And so we're in a position where we've made good progress with all of them which is encouraging.
I think the thing that we're most excited about is the fact that they are seeing now has 20 sites manufacturing INTERCEPT platelets. And so, we saw a pretty significant ramp up in Q1 with respect to their actual platelet penetration.
But I think even more encouragingly we saw a pretty big step up in terms of their production volumes and percentages, which will bode well for future quarters.
Matthew Blackman
All right, great. Appreciate that.
Kind of a couple of follow ups. Just curious on the seven day U.S.
platelet label. I assume that's just literally a label change rather than customers getting to do something differently from a process standpoint.
Is that -- first of all, is that a fair characterization? And so the follow-up to that is, is it also fair to say that beyond also improving productivity and efficiency and the relative value versus the other one step options that this would also help augment?
So the argument for a premium price, the premium price, you guys are asking for an INTERCEPT? And then I got one more question after this.
Obi Greenman
Yes. So you're right, Matt.
This would be a label change. It's still we believe it will be 180-day review after we get the submission end.
So there's a lot of data that will go along with that submission, both from the recovery and survival study that I mentioned, but also data from Europe. What we've seen in Europe is the earlier release that's available with INTERCEPT, early releases with the playback component allows for an effective shelf life that's six or close to seven days at times.
And that really does increase the overall operational efficiency of blood centers, allows them to collect blood during the week as opposed to on weekends, and it really bridges sort of supply gaps that you would otherwise see. And so, at least from our perspective, it does provide a value added benefit, that all the way it should be reflected in pricing.
We already see that with pathogen reduced platelets in the United States. Yes, I think that addresses your question.
Matthew Blackman
Yep. And then the last question, Kevin, as you said, impressive SG&A leverage in the quarter.
Sorry, if I missed this. But is this sort of roughly $16 million per quarter run rate the way we should be thinking about the back half of the year on the SG&A line specifically?
Kevin Green
Yes, I think -- thanks, Matt. I do think it'll pick up slightly.
But we are certainly seeing a continued slowdown in travel and conference attendance and the most of those are marketing related. We are also as Obi mentioned in the prepared remarks starting to step up for the cryo launch.
So I think there'll be a slight step up, but it's not going to be at the accelerated levels.
Matthew Blackman
All right, I'll hop back in queue. Thanks so much, guys.
Congratulations on a very good quarter.
Obi Greenman
Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from Josh Jennings from Cowen.
Your line is now open.
Unidentified Analyst
Hi. This is Eric on for Josh.
Thanks for taking the question and congrats on a really strong quarter. I was hoping to discuss your recent announcement out of Hong Kong with the tender offer there.
What sort of opportunity you guys see out of at market. But more broadly, how do you see the opportunity in Asia Pac evolving, now the INTERCEPT has an initial presence in the region?
Obi Greenman
Thanks, Eric. Yes, I'll let the Vivek handle that.
This is a an effort that we have underway for a long time in Hong Kong. And we conducted the important clinical study there over the last several years that ultimately led to the outcome, but Vivek can provide more perspective on through the tender, but also the larger strategy in APAC.
Vivek Jayaraman
Yes. No, thanks for being.
I think the way the question was ask, it’s actually frame that I want to think about it perfectly. The overall size of the markets above 3000 units and the tenders over the course of five years, and the initial tranche is about 20%.
But more importantly, if you think about the influence of the Hong Kong Red Cross and their involvement with the Asia Pacific blood network, they're an incredibly influential customer. And so as we think about whether it's further progress into Mainland China, or the key geographies in Asia Pacific region.
This is without a doubt a very critical and statistically important beachhead. There's a lot of untapped opportunities for us in that part of the world.
And so having sort of a premium anchor tenant is a key step forward in terms of executing against our strategy.
Unidentified Analyst
Great. Thank you.
And then separately, the FDA guidance window on platelet safety as you highlighted, that's only eight months away now. So with that deadline approaching, has the pace of INTERCEPT adoption changed in the past few weeks, or should we continue to expect incremental adoption through that March 2021 timeline?
Obi Greenman
Again, I'll turn that over to Vivek, just to cover sort of the growth in the U.S. through the remainder of the year and through the compliance period.
Vivek Jayaraman
Yes, certainly. As I think Kevin indicated, previously and Obi certainly touched on this as well.
As we think about in the future period, the U.S. and particularly the U.S.
platelet business is going to be probably the single most significant driver of growth. And what we've been experiencing year to date, I think supports that contention.
There have been -- and so we didn't come into the year anticipating the pandemic. And as you know, the hospitals here in the U.S.
have had focused on COVID triage and really a lot of elective procedures and so forth were canceled so that you could Marshal resources to address the COVID surges that rolled through the country. And so that invariably had an impact on platelet utilization and guidance compliance.
Having said that, I think everyone's sort of waking up to the fact, but that deadline is there. There's been a methodical move in terms of platelet adoption independent of the COVID pandemic.
But I think you're going to see continued push forward. I think the guidance compliance period coming to an end here certainly serves a bit of a wakeup call, but there are still going to be the media pressures relative to COVID that are going to distract hospitals to some extent.
But I think net-net you'll be really solid and compelling growth at of our U.S. platelet business.
Unidentified Analyst
Understood. Thank you guys for the questions.
Obi Greenman
Thanks, Eric.
Operator
Thank you. [Operator Instructions] And 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.
Obi Greenman
Well, thank you all again for joining us today. We will be participating in the Cantor Virtual Healthcare Conference next month.
And look forward to seeing virtually many of you then. Thanks again for joining us today.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.