All right, let's go ahead and get started. My name is Ross Osborn, the MedTech and Diagnostics Analyst at Cantor, and today we have Cerus Corporation. We're excited to dive into details, but maybe before we do, I know you guys have a disclosure you want to go through.
Yeah, thanks, Ross. Thanks for having us here. Today we may talk about forward-looking statements, so we call your attention to our risk factors in Form 10-K and 10-Q. In addition, to the extent that we make any financial comments that are non-GAAP, we would ask that you read those in conjunction with our financial statements, also reported on Form 10-K and 10-Q.
Got that one down.
Yeah.
All right, jumping right in. Obi, you want to provide a background on yourself? We'll start talking about the company.
Yeah, my name is Obi Greenman. I'm the President, CEO, and Chairman of Cerus. I've been at the company for 30 years now, and we're really sort of transforming transfusion medicine in the context of making INTERCEPT Blood Systems as standard of care globally.
Great. Kevin.
Kevin Green, CFO. Been with the company for quite some time and excited to have the opportunity to work with this exciting technology that does impact millions of lives and financially, I think we're at a real inflection point in reaching profitability.
Absolutely, and then maybe to level set the room, just for those less familiar with the story, Obi, could you provide a background on Cerus?
Yeah, Cerus was a company that was founded in the early 1990s during the HIV and hepatitis epidemics that were impacting the blood supply. And the goal at the time, and still is today, was to find a definitive safeguard for transfused blood components: platelets, plasma, and red blood cells. We've been at this for many years. We were partnered with Baxter Healthcare for about the first 14 years of our existence. And then as they sold the division that we were working with to a private equity buyer, we ultimately got all the rights back and decided to go out and commercialize the products ourselves and started in Europe. And now have the product in over 40 countries around the world and are consistently penetrating the still largely untapped total addressable markets for the product.
Great. And then you guys somewhat recently reported strong Q2 results. Kevin, do you want to maybe run through the top line for us and how we should start thinking about cash profile?
Yeah, so 16% growth year- over- year. We increased our guidance from the previous guidance to a new range of $200 million-$203 million. Increased our guidance on our IFC product to $16 million-$18 million, which is, excuse me, almost the doubling of that product profile. And we think as we look forward, that's going to be a very important growth driver for us in the midterm. As far as the rest of the financials, we burned $3 million for the first half of the year. That was largely anticipated. For the full year, we expect that we'll be able to generate operating cash flow positive. Margins slightly improved, but fairly stable, which is where we expected. And we continue to get increasing leverage on our SG&A and R&D, which largely is reimbursed by the government.
So all systems go, which gives us confidence in our goal of establishing the second year in a row of positive adjusted EBITDA. This was our fifth consecutive quarter, which we reported. And I think based on our guidance and where we see the rest of the business, we have increasing conviction that we'll get there and improve from here.
Great. Then you mentioned IFC, which is obviously an exciting part of the story. So maybe for those that don't know what IFC is, Obi, can you run through that business segment and market need?
Yeah, so IFC stands for INTERCEPT Fibrinogen Complex. It is a pathogen-reduced cryoprecipitate that has some unique benefits. Other than being just pathogen-reduced, we have what is a five-day thawed shelf life. And what that affords is the ready availability of a fibrinogen supplement for patients that have major bleeding events. So if you're a physician, either in cardiovascular surgery or in a maternal hemorrhage situation or trauma situation, the benefit of this product is that it allows for immediate availability of fibrinogen to address the bleeding coagulopathy that's happening. And ultimately, what that allows transfusion services to do is to really sort of be a hero in the moment where they can actively make this product available in advance of a problem. And then if the product's not used, they can come back to the transfusion service. The historical comparator is with conventional cryoprecipitate.
It typically takes about an hour for that product to be available. And then it has a four-hour shelf life after being thawed. And that leads to wastage rates anywhere in the range of 15%-30%. So typically what that means is that the physicians aren't getting the product as fast as they want, and there's a reluctance to provide it in the event that it's wasted. The other alternative to cryoprecipitate is fibrinogen concentrates, which are starting to be made available in the United States. That product is a lyophilized product, but it still takes upwards of 15 minutes-20 minutes to be reconstituted and has to be provided in real time. So there's an issue of timing and decision-making, and it also has a short shelf life.
Ultimately what we're seeing now in the market is a change in transfusion guidelines, where typically for massive transfusion protocols, where you have a major bleeding event, there's multiple rounds of blood components that get to the OR. Now with our IFC product, that's being put in the first round with the goal of ultimately precluding the need for future rounds of that MTP protocol. It's really an exciting product for us. It's still in the early innings as far as our product launch. We believe it's roughly a $300 million TAM. A lot of growth opportunities for us going forward.
Great. And then maybe just spend some time on commercialization of IFC, what geographies you're targeting, what the adoption rate should look like there. Is this something that could be worked into guidelines for major bleeding events?
Yeah, so our primary focus right now is in the United States, where we had a breakthrough device designation from the FDA, realizing the importance of addressing critical bleeding events. I think we are looking at ex-U.S. opportunities, but right now the main commercial focus is the United States. We still think it's a very untapped market for us. And I mentioned the massive transfusion protocols as being one of the major sort of guideline changes that we're seeing. It's being brought earlier and earlier into those MTP rounds. But also just in general for CV anesthesia, for example, they love having a product that can address bleeding or oozing post-op or during the surgery so that they can get the patient out of the OR timely without having any kind of concerns for residual bleeding.
So we're seeing it really in the context of sort of investigator-initiated studies, the product being used in trauma, maternal hemorrhage, CV anesthesia, liver transplant, so across the spectrum of indications.
Great. And then longer term, what geographies outside of the U.S. make sense to go after?
There's still a lot of markets that are using normal cryoprecipitate with the challenges that that product has as far as ready availability. The U.K. would be one example. Other markets where they have more established use of fibrinogen concentrates, we think those markets are also interesting. It's just from a Cerus perspective, what are we prioritizing? And then ultimately, Asia-Pacific is obviously the largest market for transfused blood components. And so that's clearly a focus for our commercial team over the sort of mid to long term.
Great. And then could you just provide an update on the platelet business as a whole? Pretty well adopted here in the U.S., but remind us where else.
Yeah, so our INTERCEPT product for platelets has really benefited from the U.S. FDA guidance on bacterial safety and platelets. That was finalized, I believe it was 2021 now. So we saw 20-plus% accumulated annual growth rates for over the course of eight years for that product as the guidelines were finalized in the United States. We're still about 65%-70% penetrated in the United States. So there's additional upside opportunity for growth in the U.S. Ex-U.S., it's somewhat binary. You either have certain countries like France or Switzerland that are 100% INTERCEPT platelets and others that have not yet adopted. We made an announcement last week around the German guidance document that's being established or sort of modeling the U.S. situation around platelet safety.
That was a group called AK Blut, which is sort of their Blood Safety and Availability Committee, that we believe will lead to what's called a PEI Stufenplan guidance document, if you will, on how blood centers in Germany have to implement new measures to address bacterial safety and platelets. In other large markets, globally, we're probably only about 25% penetrated of the platelet TAM. Some of the bigger opportunities are in Asia-Pacific, China, and Japan, but also in Latin America.
Great. I guess before we get to the Asian markets, within the U.S., I believe you mentioned 60%-70% penetrated. What gets you guys up to 80%?
Yeah, so the main competition for us in the U.S. market is large volume delayed sampling, and that's, I guess the easy way to describe that is that bacterial culture in and of itself is not that sensitive. And so what they do is they hold the platelets for three days before they take the sample to essentially have bacteria that are in the platelet components grow up, and then they sample more volume. And that allows for the product to be released because theoretically any bacteria that was in the platelet would be detected. There are a lot of false positive and false negative results as a function of that. In the United States, it comes down to, does the hospital have access to pathogen-reduced components with INTERCEPT? What are the economics for them?
Their blood supplier can say, "Well, we're not providing that product at the price point you want, so you're not allowed to have it." A lot of it comes down to platelet availability. We do believe that as we launch the INT200 in the United States, which is a next generation illumination device that will be launched probably in the 2027 timeframe, that that's another opportunity to go out and detail those customers that are not yet at 100% INTERCEPT. Just for example, the American Red Cross, which represents about 40% of the U.S. market, is 100% penetrated with INTERCEPT. It's OneBlood, which is about another 8%. We have sort of a different, it's a little balkanized in the sense that you have certain blood centers that are 100% penetrated with our technology and others that are sort of sub 25%.
So we think there's a lot of opportunity to grow, but we believe that the ultimate premise of having a pathogen-inactivated component as opposed to just something that only addresses bacterial safety by improving bacterial culture efficacy. It's just apples and oranges. And so we believe that the hospitals ultimately really want an INTERCEPT-treated component.
Great. And then maybe turning to China as well as Japan, what does the pathway to material adoption look like there?
Yeah, so in China, we have to go through the NMPA approval pathway. The historic concern there was that we needed Chinese clinical data to be able to get an approval there. We have been in routine use in Hong Kong for about a decade. And so we believe that that's largely been addressed both between the U.S. data that's available, but also the Chinese clinical data. We have a very strong partner called ZBK in China who has been helping us navigate the NMPA pathway. And on the most recent earnings call, we mentioned that the NMPA did come back to us, sort of a constant dynamic of the regulatory requirements in China at the moment.
They came back and said, "Oh, we'd love to see some in vitro data coming from Chinese blood centers in mainland China before we accept, go further with the NMPA process." So that will probably take us a quarter or two to generate that data, but we'll be back on track in 2026. Other major markets are in Japan, where we have the Japanese Red Cross. It's probably one of the largest blood suppliers in the world. It's a single decision maker. They've just rolled out large volume delayed sampling, and we think that's going to impact overall platelet availability in Japan, but we'll have to see. So that's sort of the discussion ongoing with potential partners in Japan as well.
Perfect. And then maybe switching gears to red blood cells. Could you walk through the market need there and where you guys stand on the regulatory front?
Yeah, so there's sort of four major blood components that are transfused. You have platelets, we've talked about, plasma, cryoprecipitate, which is a derivative of plasma, and then finally red blood cells, which makes up about 70% of all transfusions globally. So obviously it's sort of the one thing that all blood centers think about with regard to the blood supply every day. Do they have the red cells to get to the hospitals and the patients? And part of the reason I mentioned that is that when you're a blood banker, you're sort of like, "Okay, well, I've got ways to pathogen activate the first three that I talked about, but not the last." And so you don't have a complete solution until you get the full portfolio of INTERCEPT products approved. Right now we are under regulatory review in Europe.
We hope to have an approval decision in the second half of next year, so it's a CE mark MDR process. It is a Class III device in Europe, and so you have a combination of a competent authority and a notified body, but we're progressing through that process. It's been four years now of a process, so we believe we're hopefully coming to the end of that. In the United States, we have two phase III study requirements required for a PMA submission. We completed the first phase III study last year, and we have another one that will complete enrollment in the second half of this year, and then once we have that data, which we'll read out in the second half of next year, we'll be able to have discussions with the FDA about the PMA sort of submission timeline.
Great. And then in Europe, what are the key risks to approval there?
Yeah, so historically, there's some concern about, do you have enough clinical data both in acute and chronic transfusion? We did a very large study in chronic transfusion recipients, thalassemia patients that read out positively. Initially, our competent, sorry, notified body TÜV said, "Well, we need to see additional acute data." And so fortunately, we benefited from the phase III study that we did in the United States called ReCePI that read out positively last year, and we submitted that as part of this CE mark submission process. So I think they've accepted all indications for red cell transfusion now. So that's one risk that we've hopefully checked the box on. The other concern that the notified body had historically was around the impurity profile in the API or the active pharmaceutical ingredient that goes into the INTERCEPT red cell system. And there we've done additional toxicology studies.
There's just new requirements that are under the ICH M7 guidelines about the impurity profiles in pharmaceuticals. And so we think we've also addressed that issue, but we will be getting back feedback or questions from our submission from our competent authority, the TÜV SÜD body here in the near term. So hopefully it seems like things are moving in the right path, but we'll know more definitively sometime this year.
Great. And then post-approval, hopefully second half of next year, what is the commercialization plan there?
Yeah.
Dr. Corash?
The initial focus will be on the red cells that are irradiated. About 20% of all red cells are irradiated to prevent what's called graft-versus-host disease. It's when the white cells in the red cell component from the donor attack the recipient, who might be immunocompromised, or if you're a child, you typically get irradiated components as well. Varies between 10%-30%. Sometimes hospitals irradiate all their components because they've got a very big population of immunocompromised patients. What happens when you irradiate red cells? It damages the potassium ion channels in the red cell, leading to potassium leakage and an impact on overall red cell viability. It shortens the red cell component from typically 42-day shelf life to 14 days. With our system, we inactivate white cells much better than irradiation does, and we have a 42-day shelf life plan.
So I think that fundamentally that's an obvious market to go after. And if we can capture 20% of the overall TAM for red cells right out of the gate, that's an obvious focus for us.
Definitely. And then I guess maybe switching back to the financial model, Kevin, can you walk through key drivers on the gross margin line that we'd see some leverage there?
Yeah, so excuse me. There's a few factors. First and foremost is the economies of scale. We have a fairly simple set of SKUs. So getting more capacity out of the manufacturing facilities is the first driver. The other is product mix. As platelet customers convert from single dose to double dose kits, think about it as an extra bag, but we're able to generate almost 2x the revenue for a couple euros more of global product costs. So that's another driver of gross margin expansion. And then lastly, which plays out over a longer period of time, is some of the COGS reduction initiatives that we've had underway for three or four years. So sourcing components from lower cost jurisdictions like the Dominican Republic, more manufacturing of sub-assemblies in those geographies.
And then lastly, overall development of product configuration and getting at a lower cost, higher throughput product configuration. All of those really lead to COGS improvements. Over time, we expect that we'll be able to continue to get price increases for the value that we're conferring to customers, especially here in the U.S., where we really wanted to address the guidance document that Obi referred to and make sure that we had product available to customers. We're starting to see that customers are benefiting from that. And as we get a seven-day claim, as we have the LED illuminator, we'll want to make sure that we're capturing some price increase for the value that we're conferring to customers. So I think all of those combine to a fairly direct line of sight into margin expansion.
Makes sense, and we spent some time discussing single dose to double dose, why that would be attractive to a customer.
Do you want to add a little bit?
Yeah, I mean, there's a number of factors on their overall blood collection operations, whether or not they do apheresis versus buffy coat like they do typically in Canada or in Europe. It also depends on their donor profiles. So to the extent that the number one cost for a blood center is donor recruitment. So if they have donors in their database where they know they can get a double dose, so one donor can get two therapeutic doses, that's a direction they want to move towards because it's a lower cost for them. So we want to make sure that we have that product available to them. In Europe, as I mentioned, they do typically buffy coat, and so it's basically a whole blood derived that's spun down.
They're able to get a double dose much more easily than you would necessarily for donor recruitment and an apheresis platform like the U.S. So we've seen a lot of movement towards a double dose kit in Europe, also in Canada, and we expect that that's going to continue.
I would add just that we spend a lot of time as a company helping with the operational efficiencies for blood centers. And what that ultimately does is lead to better economics. The highest price product that they have are platelet products. And so the more they can get out of any collection or from a donor pool, it really optimizes their economics, but also the availability of platelets in general.
Got it. And then you alluded to this earlier, but could you run through your next- gen illuminator?
Yeah, so for the first-gen product, the initial illuminator used UV bulbs. And so since most light bulbs are going out of business right now and everyone's moving to LEDs, same thing is true for our product. And that led to a development of a whole new LED-based light system to illuminate the platelet or plasma components that use the photochemical mechanism of action that we use for INTERCEPT for those components. That was a pretty big R&D investment, just given that both the European and the U.S. regulators saw it as sort of a new product just because we changed the way the light was being delivered to the components.
The upside of it is that we really took the time with our customers to figure out how do we want to optimize it so it's a lot easier for you to use the product, reduce labor in a faster throughput, and then also create a whole IP platform for us, not only in the U.S. and Europe, but globally to sort of extend our IP protection for the platform. I think the main protection for what we do is it's just very complicated. We're a drug device combination that's regulated as a biologic. So there's no sort of biosimilar or logical way that you can go after and get this product approved, even if there was no IP protection, without going out and doing all the clinical trials that we've done.
Just speaking to the LED illuminator platform, the initial draw in Europe, obviously is something that we've been very focused on looking at as far as its performance and how reliable it is, given the historical reliability of our platform. And the one thing I just want to make sure I impart is that now that we're the standard of care in many countries around the world, we can't go down as a company. So if we don't supply our kits or our reliable devices to blood centers, the blood supply chain, because we're really the only game in town in most markets around the world. And so there's a big responsibility for the company, and we sort of live every day that we're helping our blood center partners maintain the safety and availability of blood supply globally.
Got it. And maybe going off of that, it's a bit of a double-edged sword. Could you talk about some of the expenses associated with being the sole supplier?
Yeah. Well, obviously every tender award, every contract we have, there's got to be business continuity planning that goes into that. So how do we maintain assurance that there isn't going to be a problem? So that's one of the things, having redundancy in supply, carrying inventory levels of safety stock that obviously impact financials. I think the other thing is the nature of the products, because of this complexity from a regulatory standpoint, it's a drug device combination. So anytime you change any part of that, it's regulated at sort of the highest standards possible. And then ultimately, the blood component is also regulated after you treat it. So in many countries around the world, you have the initial approval, but then you have the approval of the product as a blood component. All this being said, it is sometimes a burden, and it's expensive.
At the same time, we're creating the standard of care that will be very hard to displace.
Definitely, and then you also benefit from government funding.
Yeah.
Would you walk through your DoD contracts first?
Yeah, we've got a few areas of government funding just because of the need for ensuring the safety and availability of the blood supply. We do have a DoD contract with the Department of Defense for a lyophilized version of our IFC product. The idea there being that when you have war fighters sort of far forward, it's very hard to get them blood components real-time when they need it. Typically, there was what historically was called the golden hour during the wars in Afghanistan and Iraq, that if you've got a patient or a soldier to an operating room and could maintain them for the first hour with, or at least get them transfused within an hour, that you would save their lives, and the data was really remarkable. Now the goal really is, well, how do you maintain them for that first 15 minutes even?
One of the ways you do that is with lyophilized or freeze-dried blood components. Big focus historically has been on plasma, but with the benefit of IFC being a concentrated version of fibrinogen and other clotting factors, if you can get that far forward, that'll have a big impact. So that's what the DoD is funding. And they just funded a study for us in the United States called the Cryo-FIRST study, really trying to show that IFC can deliver sort of similar results clinically so that the future state with a lyophilized version of IFC can sort of show comparable efficacy in that setting.
Great. Any questions from the audience? Yes.
I'll just repeat the question quickly. On the balance sheet and cash runway.
Right. Yeah. And the debt and the payables and the receivables. Yeah. So I think it's a growing business. We manage our DSOs pretty tightly. We also manage our payables pretty tightly. So those are generally in concert with each other. On the debt load, we do have $65 million of term debt that starts to amortize in April of next year. We do maintain an option to extend that for an additional year, which we've met the requirements for. So what we're focused on right now is getting the business to a point where we're continuing to generate operating cash flows and can service that debt either ourselves or through a refinancing mechanism of lower overall cost of capital and/or use part of the balance sheet, which we have about $80 million on the balance sheet today to bring the overall principal balance down.
Beyond that, we really do like the revolving line of credit, the asset-based line, because we are growing 20% or so, and so maintaining those inventory levels that are so important to customers, maintaining DSOs, even if the DSOs don't change, the business growing at 20% consumes more and more capital, and we'd like an attractive cost of capital to offset otherwise balance sheet cash, so that's how we think about it. I think we're the business generally operating from an operating perspective is at a point where we're really quite confident that we'll be able to service that debt and move forward.
Perfect. Well, with that, any last remarks or comments you want to leave the room?
No, I really appreciate the opportunity to come and have this discussion with you today, Ross. And yeah, we're excited about what's coming between now and the end of the decade. There's just a lot of opportunity to finally realize our company is very mission-focused and very focused on how do we make this product a standard of care globally. And we've obviously demonstrated that in many markets, but there's a lot of other opportunities. And the final goal of making sure that patients have access to safe blood in real time. The company was really founded, as I mentioned before, in the early 1990s when there was a lot of uncertainty about the blood supply. We've had a number of epidemics and pandemics since. Fortunately, with COVID, it wasn't a transfusion transmitted disease, but if it had been, it would have been a real mess.
Thank you for being here. Appreciate the time.
Appreciate it.
Thanks, Ross.