Cerus Corporation (CERS) Earnings Call Transcript & Summary

Good afternoon. We're continuing down the medical devices track at the 41st Annual Cowen Health Care Conference. We're excited to have William "Obi" Greenman, President and CEO; Kevin Green, Chief Financial Officer; and Matt Notarianni, Senior Director of Investor Relations from Cerus. I'm Josh Jennings and along with Brian Kennedy and Neil Chatterji and Eric Anderson represent the Cowen Medical Devices research team. Cerus team, thank you guys so much for participating once again in the Cowen conference. I'm going to hand it over to Obi for a couple of slides. And we'll go right into a Q&A session, if that's okay.

Great. Thanks a lot, Josh. Thanks for having us. Appreciate it. So we're just going to walk through a few slides just to orient the audience to Cerus and what we're trying to do in creating a new standard of care in blood safety. First of all, I acknowledge that I'll be making a number of forward-looking statements today. And so I wanted to refer you to the risk factors as defined in or as described in our SEC 10-K and 10-Q filings. Next slide, Matt? So we're really the leader in the field of blood safety and availability. And we've got a proprietary and proven technology that's been demonstrated over the course of the last decade to improve blood safety and availability around the globe. And now specifically in the U.S., we're seeing an evolving standard of care for platelet safety. We have the only approved pathogen activation system for platelets in the United States. We also have our plasma system approved as well. So it's nice that we have a system that can -- a blood center can implement to treat both platelets and plasma. And we also have a strong focus on getting to cash flow breakeven. Next slide. So just to give you an idea of the overall TAM's globally that we're addressing with our product portfolio. You'll see here the various market opportunities by region. And highlighted in blue are the markets that we're currently selling into for platelets and plasma in EMEA, North America and Latin America. We have a red cell program that's in late-stage clinical development in the U.S. and has been filed for regulatory approval in Europe. And we also just recently got approval for our pathogen-reduced cryoprecipitated fibrinogen complex in the United States, adding another $300 million TAM for us to address that we're currently working through and launching the product in 2021. And then finally on this slide, I'd note that given the size of the Asia Pacific market, we've been very focused on how do we address that, specifically in China, given that will be the largest market opportunity for Cerus over the course of the next decade. And we announced last week a partnership with ZBK, a very strong partner in China that has not only experience with pathogen activation from a policy and regulatory perspective in China, but also has a direct sales force and local manufacturing to increase our overall capacity to address that market. The next slide? So just to give you a little bit of a background on sort of our revenue trajectory over the last couple of years. We've seen strong revenue growth, specifically in Q4 of 2020, where we grew the business 35%. Specifically in North America, we saw revenue grow substantially in 2020 at 54% year-over-year, even in spite of the COVID challenges and access to hospitals, and then 75% quarter-over-quarter. EMEA also grew as well, even off of a fairly strong base there. Next slide. And then finally, I just wanted to provide you our revenue guidance for 2021. We're forecasting 15% to 20% revenue growth of approximately $106 million to $110 million in product revenue globally. And that anticipates some modest contribution from our pathogen-reduced cryoprecipitated fibrinogen complex product, but that will really take place in the second half of this year. Really the U.S. growth of business -- the growth in the U.S. business is really going to drive our overall revenue growth in 2021. And with that, Josh, we'll turn it back to you for questions.

Excellent. Thanks for that download, Obi. And I think I want to focus our questions on what we believe to be just on the growth opportunities here. I mean within our SMid-Cap coverage, Cerus has one of the premier, multilayered, multiyear growth stories out there. And we wanted to kind of plow through a couple of the different layers, peel back a couple of different layers and understand them a little bit more. Starting with the U.S. platelets, your core -- INTERCEPT platelet business, your core franchise that's approved and has been ramping nicely. It seems that there's been -- the blood space, there's never rapid movement in terms of adopting and implementing new technologies, but we see INTERCEPT platelets becoming standard of care worldwide. And I think that's been validated by your success as well as some decisions by major blood centers in the United States and globally. But if we could just start to focus on the U.S. platelet market to begin with, I wanted to get a sense of where the American Red Cross stands today. They've been very public, and we've never heard of a customer, at least in the med-tech space where they are the largest customer in an industry, and they claim that they're going to move to 100% adoption of a specific technology platform. But that is what the American Red Cross has done. They're about 40% of the market. Where are they on the adoption curve? And maybe any other details you can share on the ramp within American Red Cross of INTERCEPT platelets?

Yes. They've been a fantastic partner and clearly are the major figure in blood bank in United States and I'd say globally. I think the leadership there has had a clear vision as far as what they're trying to achieve with regard to safeguarding the blood supply in the United States, but also securing value-based pricing for innovation. So they've seen that historically, blood banking has been a sort of a commodity business and where they've had to adopt new testing technologies or new technologies in general. They haven't been reimbursed for it. So with INTERCEPT really affording a lot of cost offsets, I guess for blood centers and hospitals for that matter, as far as reducing the testing requirements, getting rid of radiation, CMV testing, changing donor referral criteria. They saw an opportunity to say, "Hey, this is the next innovation in transfusion medicine. We want to secure premium-based pricing for this product." And so that's driven them not only to safeguard the blood supply and make sure that it's available, but also to realize value-based pricing. So to answer your question specifically around how their market share adoption is changing right now, so they have told all of their customers publicly, they plan to be 100% INTERCEPT by 2023. They, in that same communication, had communicated that they would be at roughly 40% market share by sort of the end of February. And right now, it's our understanding they're likely above that. So they're making solid progress with regard to their hospital conversions. And then finally, they've got 22 platelet production sites, and all 22 are using INTERCEPT in routine and are ramping their overall production on almost a weekly basis. So that's been a really strong sort of indicator of the growth of the business in the United States. You see of the top 5 blood centers, of which the Red Cross is one of them, they represent roughly 70% of the overall blood supply. And we also see additional ramp in there, not at quite the same pace, but I think a couple of those big 5 may try and catch up to where the Red Cross is with regard to their overall market conversion -- or INTERCEPT conversion by the end of this year.

Excellent. Any other details you can share just on the remaining big 4? I know the American Red Cross is the biggest of the big 5, if you will. But any -- I mean that from a high level, that seems like very positive momentum with the other 4 -- these 4, #2, #3, #4, #5 blood centers in the United States. But any other details you can share just on that ramp through the end of the year and beyond? I mean typically, the American Red Cross is a leader and they're fast followers. So it's been our assumption that the other -- the 4 in the big 5 would follow ARC's lead, and it sounds like they're doing just that.

Yes. I think they are on different sort of ends of the spectrum, where -- I mentioned 2 were sort of playing catchup quickly. They're really sort of positioning INTERCEPT, like the Red Cross is, as sort of the new standard of care and the preferred option, because of the ability to really address bacterial contamination more definitively than large volume delayed sampling where you're just trying to improve the testing sensitivity of bacterial culture. But also the other benefits of being able to address emerging infectious diseases also address things like Zika and Babesia testing, the other benefits that I mentioned before. The other 2 blood centers, I'm not going to call them out specifically, are taking more of a passive approach, I'd say, in the sense that they're offering both options to their customers. One's INTERCEPT at a higher price premium, but they're not as sort of effectively communicating, "Here's where we're leading the field for." They're still providing options for their hospital customers. And in this environment, some hospital customers are trying to understand the economics and the price differential, which I think is important. At the same time, what's been clear from the Red Cross and their communications is -- and once you have a single standard of care that allows you to release products earlier like INTERCEPT does, you don't have to wait for the results from bacterial culture. You have an ability to streamline your overall platelet supply logistics. And I think that's really starting to resonate with the hospital customers. And the final thing I'd say is that even with some of the uncertainty around some of the hospital customers, the 7-day label claim that we're hoping to secure in the second half of this year, assuming a submission in the first half of this year, will really drive further change and acceleration of the revenue, we believe, just because of the overall effect of shelf life is so much longer than the other options. So it really will reduce wastage and improve availability, like we've seen in France and Switzerland.

No, excellent. And a couple of follow-ups there. I mean just one on the FDA mandate or their guidance kicking in for -- that hospitals have to use or adopt platelets where, back to your contamination risk mitigation strategy, has been in play. INTERCEPT platelets is, we believe, the premier option. But as we get the pandemic push that D-Day out from the spring of this year, I believe, until October later this year. But the writing's on the wall, the rubber's going to meet the road in Q -- beginning of Q4. Are hospitals moving in the right direction? Our assumption is they are. We don't expect an inflection of hospital customer demand that would maybe drive some blood center INTERCEPT platelet manufacturing ramps. But just wanted to sanity check that assumption of this continued adoption pace in front of the mandate. And then getting stronger post-mandate clearly, but not a big inflection, and there's a lot of growth between now and -- in the U.S. and the mandate kicking in.

Yes. I think that's the right way to think about it. What we have seen is some hospitals were on track to be compliant, and they decided to stay on that track. I think the one thing that sort of surprised us is there are a number of blood centers that have said, "Hey, we were looking at both large volume delayed sampling, the other alternative in INTERCEPT, given that we weren't able to get to 100% INTERCEPT." And now with the 6-month delay in the guidance compliance time line, they're sort of deferring decisions around implementing large volume delayed sampling just because they want to see where they're at into the summer. So overall, I don't think it's been a bad thing. And I think as you sort of laid out the trajectory of adoption, I think that's the right way to think about it.

Great. And just you talked to the 7-day label claim, that expanded label opportunity that you're going to submit for and likely get approval for. I mean that's really the only piece or value proposition with large volume delayed sampling approach is just the extended shelf life. But the way we look at, I think you -- through your team educating us and also at ABB, when these different strategies have been detailed and laid out, I mean you basically get extra days from just a standard culture technique if you use large volume delayed sampling, but you don't actually get more days than the shelf life of an INTERCEPT platelet unit. But now with 7-day, you'll actually get 2 days of extension from that kind of 4-day shelf life of a Cerus INTERCEPT platelet unit, considering that blood centers can ship out INTERCEPT platelet on that day 1 after collection. Sorry, there's a lot of details in there for the audience. I apologize. I don't have a chart up to show that. But I mean is that the correct way to think about the 7-day label expansion opportunity, Obi?

Yes. I think Matt was trying to pull up the slide that helps cover that a little bit, because it is somewhat complicated. Yes, there's a lot of misunderstanding around the LVDS 7-day product and that you will have to wait 60 hours to be able to release the product. So that's the real challenge. And ultimately even with a 5-day INTERCEPT product, you only got a 12-hour difference from a -- half a day difference than a 7-day labeled LVDS. So I think what you're alluding to, though, Josh, is just once you get the additional 48 hours, you really are -- have the dominant effective shelf life. The other benefit, obviously, is the earlier release. If you got a specific deficit of platelet availability, you don't want to have to be waiting 48 or 60 hours to be able to release a product. INTERCEPT allows you to do that much more rapidly.

Excellent. And just a sanity check and another question on the 7-day indication, I mean platelet functionality stored at room temperature, I mean I assume that's what part of the filing is going to detail and document, that the platelet function is still maintained out through day 5 or day 7 of INTERCEPT platelet. But what is the risk there that platelet functionality has impacted in day 5 through -- or day 6 and 7?

Well, from an in vitro standpoint, we've done this myriad of studies and don't really see a big difference. And in Europe, now in routine use in France and Switzerland and elsewhere. Again not seeing a huge impact of the extended storage of INTERCEPT platelets out to 7 days. The FDA has a criteria, which they -- for recovery at plate label -- platelet radio-labeled recovery and survival studies. So what they're looking to do there is looking at INTERCEPT platelets stored out to 7 days. And then you radio label them to see how long they survive in the subject and what their recovery is after you transfuse it. And they compare that to a fresh control. And so that's the threshold that we're trying to meet in the context of our clinical study to support this 7-day submission. That study is almost complete. There's been some delays in that. There's only 2 sites in the United States if you can do that right now. And so we've been trying to get them moving post sort of their COVID summer lockdowns or shutdowns in 2020, and just trying to get the last couple of subjects completed to be able to get that submission in. So I can provide you more data on that, Josh. But fundamentally, it's just -- do these platelets have a similar recovery in survival at 7 days to meet the threshold from the FDA.

Great. And you guys have real-world experience in the European countries and been approved there for the 7-day shelf life indication. So I think that, that derisks the path forward there in the U.S. Maybe moving on to the OUS platelets, the INTERCEPT platelet business and that franchise. I mean Germany is a potential strong growth driver for the international unit. Maybe we could just talk about where INTERCEPT platelet penetration is today. I believe there was a positive reimbursement -- inpatient reimbursement for INTERCEPT platelets that was put in place for 2021? And how should we be thinking about the ramp from here for INTERCEPT platelets in Germany?

Yes. Germany historically has tried to address bacterial contamination by reducing the overall shelf life to just 4 days actually. So it's one of the shortest shelf lives in Europe and globally. That's led to sort of platelet availability challenges and a high degree of wastage in Germany. That being said, they have been somewhat slow to adopt pathogen inactivation relative to the surrounding countries like Austria, Switzerland and France, for example. I think what we're seeing as a function of the U.S. FDA guidance document, but also just sort of global understanding of the sepsis risk associated with platelet transfusions is that countries are starting to wake up and say, we've got to do something more prospectively to address bacterial contamination in platelets. And so the Germans are at the forefront there now as far as like evaluating INTERCEPT. We do have a number of customers that have implemented. And so we have routine use of INTERCEPT platelets in German hospitals. That being said, of the overall 600,000-platelet opportunity, 600,000 annual platelet consumption in Germany, it's a pretty low market share, still probably sub-5%. The German Red Cross represents roughly 25 -- sorry, roughly 40% of the overall market in Germany. And then there's one specific German Red Cross in Frankfurt. We call it Ba-Wu, but it's Baden-Wurttemberg - Hessen. So it's a number of different states within Germany that blood center covers. And they are actively in discussions with us about implementation of INTERCEPT and sort of the economics and operational efficiencies. And the last thing I'd add is just the -- reimbursement is a big deal in Germany at the hospital level. And what we saw last year, from our continued efforts there, is an increase actually in the reimbursement for INTERCEPT platelets, over conventional platelets from the historic reimbursement premium that we saw. So I think things are shaping up well. I still think it may be relatively slow in 2021, but it's moving in the right direction.

Excellent. I think in the year 2021 guidance, you implied that most of the growth is going to come from the U.S. platelet franchise. I mean it doesn't sound like you baked much in for Germany, just because there's some unknowns there and the pace of adoption and utilization, those 2 ramps, we'll see how they play out. Is that the right way to think about your assumptions within [ 2020 ] guidance for Germany INTERCEPT platelets?

Yes, I think that's right. I think we're going to see progress, but it's not going to be a huge revenue driver for the guidance.

Great. And so does -- that sounds like it bodes well as the market development is still in place in 2021, maybe there's some upside from Germany here this year. But 2022, you could see a stronger ramp, and there's a multiyear tail potentially for INTERCEPT platelets in Germany for the OUS business?

Yes. I think that's the right way to frame it. Yes.

Okay. Great. And then Asia Pac, I mean the announcement about a JV in China, just thinking about the transfusion volumes for all the different blood components, and as you showed on your slide earlier, massive TAM, multibillion-dollar TAM. China, biggest TAM in terms of an individual country. I don't think we need to dig much deeper because you just had your earnings call and that announcement. But any sense, I guess, given you had a range of when we could see approval for INTERCEPT platelets or INTERCEPT red blood cells or plasma or cryo in China? Is that a 3- to 5-year time line, 2 to 4? I know that it's always hard to give regulatory guidance, but just wanted to get a sense if there's anything you can share.

Yes. Our teams are working very closely already together sort of in advance of the announcement. The focus in the near term is clearly going to be on platelets. That's where they have insufficient supply of platelets to meet the demand in China. And I think given the history of pathogen activation for plasma in China where it's almost 100% of the market now, and ZBK is sort of the leader there with their methylene blue technology in China. But that was one of the reasons why they wanted to partner with us for both platelets and red cells. So they understand the market, and they are very focused on platelets. As far as timing, we still have to do an additional clinical study in China, just a limited scope to get -- or secure some additional experience with Chinese patients. Historically, we did a 65-patient study in Hong Kong in patients undergoing autologous and allogeneic bone marrow transplants, and the data from that study looked good. So that will be part of the submission. We have translated the entire regulatory doses, so that's ready to go. So it really comes down to our ability to execute this study with our partner ZBK and then really trying to define the regulatory submission time line. So I won't give you the specifics today, but it's not that far off.

Great. Great. And another big opportunity is Japan. My understanding is that Japan regulators have been, or Japan Red Cross equivalent, vetting INTERCEPT platelets for a little while now. Any chance that you could see a positive decision out of Japan in 2021 or 2022?

Well, the Japanese are clearly aware of some of the concerns around bacterial contamination of platelets. Historically, they did a really good job at managing platelet shelf life down to 3 days, even 3.5 days just to try and maintain or minimize the risk. But even with that program or policy of reducing platelet shelf life, they've still had some cases of sepsis. That being said, I just -- I think they're going to wait and see still to see what happens in the U.S. with -- about our adoption of INTERCEPT and globally. They do believe they've got effective measures in place to address bacterial contamination at the moment. And so I think the real goal will be to try and communicate to them that the overall operational efficiencies realized with a technology like INTERCEPT. So I think our focus really for Asia Pacific beyond China would be some of the other markets that have expressed interest that are large as well, like Taiwan and Korea and elsewhere.

Excellent. Maybe we could dig into cryo quickly. And it's never a good thing to do, dig into a topic very quickly. But looking at the clock here, I apologize. But INTERCEPT cryo perhaps, I mean there's value prop, clinical value proposition for every INTERCEPT indication. But cryo perhaps has not only the clinical value proposition, but maybe even more of an economic value proposition or cost-savings proposition. How do you intend to get that message across to the blood community to your hospital customers? I know you're taking a different -- implementing a different business model, manufacturing partners with blood centers. And then you're going to be selling -- Cerus is going to be selling directly to hospitals. That's my understanding. What's the message maybe? That would be good for investors to hear just as you launch this in 2021 and your full launch in 2022. How do you message the clinical value and economic value propositions for INTERCEPT cryo?

Yes. I mean as you mentioned, it really is a product where there's strong physician interest in the product is because of the recognition of the role that fibrinogen deficiency plays in bleeding patient outcomes. So if you have a patient who's got a coagulopathy or major bleeding issues from internal hemorrhage or trauma or cardiovascular surgery, there's a recognition that you need to try and figure out how to get fibrinogen into that patient as quickly as possible. And in the United States, cryo really is that vehicle or that therapeutic that allows you to do that. The challenge historically has been, well, it's a frozen product. And if you don't use it, you toss it within 4 to 6 hours. So we've really streamlined the label such that it increases overall availability and ease of use for the product. And that's a pretty simple message to communicate to transfusion committees at major Level 1, Level 2 trauma hospitals. As you mentioned, we have sort of change in the business model where we're partnering with blood centers. So they realize an economic return in the context of a manufacturing margin for us, but we're ultimately selling the finished biologic, allows us to better communicate the messaging of the product with the 6 sales reps we put in place for the 4 target states that we're launching into. And then also to really work on the new technology add-on payment to try and secure a premium reimbursement for our PR-Cryo FC is the simple name that we refer to as, but as the label says from the FDA. So -- and we should have visibility into that NTAP towards the, I guess end of -- or fourth quarter of this year, it's October 1, I think, is the CMS deadline for announcing the NTAP. And we've been able to benefit there because of the FDA's breakthrough device designation, we're able to use the -- what the CMS refers to as the relatively new alternative pathway, which streamlines the NTAP submission process.

Excellent. And just -- I referenced earlier that the blood space is a little bit slower moving than most of our medical device segments. But this INTERCEPT cryo -- I'm sorry, I'm going to keep referring it to that but...

Yes. Please.

But I mean it's a therapeutic. And I mean adoption could be much faster than what we've seen out of INTERCEPT platelets in the United States. And then INTERCEPT platelets over the last couple of years that had a pretty strong run. Is that the right way to think about it? I mean if this is a $300 million -- $200 million, $300 million market opportunity, why couldn't INTERCEPT cryo capture 1/4 of the market in the first 24 months? Why couldn't it capture half of the market? Typically, clinical -- I mean therapeutics that are introduced typically replace other therapeutics in a lot of indications. And is there anything that would delay penetration of INTERCEPT cryo, once -- with the NTAP in place, the approval and the clinical value proposition?

Yes. I mean our focus right now is to make sure we have the launch in the right place with the right manufacturing partners to secure the BLAs with our partners so that we can move to the nationwide rollout in 2022. But as you said, there's a clear unmet clinical need. Patients are dying from massive bleeding events. And so our goal will really be how do we make this product available to as many patients and physicians as possible over the course of the next 24 months. If we're successful in that, we could realize the upside opportunities that you mentioned. But our goal really is to focus on the patients and the transfusion physicians is the near term and the really Level 1, Level 2 trauma hospitals. And I think to date, the nice thing is from some of the major teaching hospitals, they're like, wow, this makes a ton of sense. And ultimately when they look at the cost relative to the cost of the challenge they have from these major bleeding events, it's not a huge price increase that they're talking about, especially if you can save someone's life and reduce the need for additional blood components.

Excellent. Maybe one last question. I can't have a fireside chat with the Cerus team without getting INTERCEPT red blood cells in the program here. So one last final question, Obi and team. It is a game-changing opportunity when you just look at the volume of red blood cell transfusions globally versus the other blood components, platelets and plasma. I think if investors don't want to give Cerus full credit for the TAM attached to the red blood cell opportunity, do you think it's fair to initially take a conservative approach? I mean the chronic transfuse -- chronically -- patients that need chronic red blood cell transfusion, the thalassemia patients, the sickle cell patients, you could argue that the biggest value proposition is in that segment, and that represents about 10 to 20 -- 10% to 15% of transfusions globally. Is that the right assumption for chronically -- chronic transfusion requirements in thalassemia and sickle cell? Or is that too aggressive?

I think it's closer to 10%. And you also include in the oncology patients, like the MDS patients that get chronically transfused or chronic red cell transfusions as well. I think the way to think about red cells is that it is the final piece to the full INTERCEPT portfolio. And so the customers that have implemented for platelets and plasma, they're looking to have something that definitively safeguards the blood supply against future emerging infectious disease threats. And so I think that's the way to look at it. Clearly, this field does move slowly, as you mentioned. So we'll be focusing on those accounts that have been sort of long-term advocates for pathogen activation, specifically for platelet. So I think they'll actually -- rather than trying to lead the horse to water, they're already at the pond. And then for them, it's more a function of how to -- our system initially will probably be able to process sort of 40 to 50 units a day with a limited number of FTEs at the blood center. So as we sort of iterate on the product offerings, and then we can get to several hundred units a day, they'll have to focus on a subset of the patients anyway, and it's likely to be the chronic transfusion recipients.

Thanks for helping us, kind of look at that opportunity as it stands now. But that is a game changer, multibillion-dollar TAM. And I think that's a good place to end. We went a couple of minutes over. But thank you, guys, for the time. Thank you for joining the Cowen conference once again, and we'll be in touch. Have a great rest of the conference.

Thanks a lot, Josh. Appreciate it. Thank you, Cowen.

Thank you.

Thanks, Josh. Talk to you soon. Bye-bye.