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WIKI ANALYSIS
Cerus Corporation (CERS), since its inception in 1991, has focused on developing medical systems, therapeutics and vaccines for the treatment of various cancers and infectious diseases. The company develops these products in association with other pharmaceutical and biotechnology companies utilizing its Helinx technology. The most significant outcome of this technology is the development of the INTERCEPT Blood System, which enhances the safety of blood products used for transfusions. The company was developing this system for platelets and plasma in alliance with Baxter International but has regained commercialization rights effective February 1, 2006. Cerus has also collaborated with MedImmune, Inc. to develop a therapeutic vaccine for the treatment of breast, prostate and colon cancer, as well as for metastatic melanoma. INTERCEPT Blood Platelet System is its one product in the European market. Cerus currently has no products in the U.S. market.
The company currently provides the INTERCEPT Blood System for platelets to the blood testing market, which offers an opportunity for growth in the coming years. Current blood testing procedures are unable to detect emerging pathogens in blood, and as a result, thousands of infectious diseases arise from transfusions each year. The company has developed INTERCEPT to eliminate these infections and other adverse transfusion reactions. Blood transfusions are required to treat a variety of medical conditions like anemia, low blood volume, surgical bleeding, and chemotherapy-induced blood deficiencies. With about 80 million blood donations occurring each year worldwide, the potential market opportunity for Cerus is significant. To take advantage of this opportunity, the company is working toward bringing the INTERCEPT Blood System to the primary growth markets of North America, Western Europe, and Japan that account for 50% of the worldwide blood donations occurring each year. As of Q207, INTERCEPT has been used in over 50 blood centers in 16 countries. The company recorded sales of $2.8 million during Q307 and $1.7 million in Q207, a 65% sequential increase from Q207 and a 41% sequential increase from Q107, respectively.
INTERCEPT has still not obtained approval for sale in the U.S. and the company has shifted its priority to expanding European approvals instead of the U.S. market. We do not expect a U.S. approval until 2010 or later. In Q307, however, the company indicated it is exploring with the FDA the possibility that European platelet data could be accepted for U.S. approval. The INTERCEPT Blood System for platelets is approved in European countries. In addition, the company received CE Mark approval for plasma in the fourth quarter 2006. During the third quarter 2005, the company received French regulatory approval for the use of the INTERCEPT Blood system for platelets. The approval authorizes blood centers to start experience trials and the studies will help develop reimbursement levels in France. The experience trials are also designed to promote platelet product adoption. During Q207, the company signed an initial agreement with the French National Blood Service (EFS) to sell French national blood centers up to $8 million in INTERCEPT platelet kits over the next two years. Currently platelet and plasma kits are being sold to EFS centers. Full French market plasma expansion is expected by first half 2008. France has a market opportunity of $36 million and Germany has a market opportunity of $76 million. The French national blood service is expected to adopt the INTERCEPT platelet system by the end of 2008. In Germany, blood centers are required to gain approval from the central German authorities in charge of regulating the blood supplies in order to use INTERCEPT on a regular basis. During the first quarter 2007, a regional German blood center received approval from the Paul Ehrlich Institute (PEI), the official regulatory body, to sell platelets treated with INTERCEPT. More importantly, the data submitted to PEI by this blood center can be used for submissions to PEI by other blood centers in Germany. This will help obtain faster reimbursement and commercialization of the INTERCEPT blood system in Germany, expected by first half 2008.In Q307, the company submitted an application to sell the platelet system in Switzerland, with a plasma application submission following. The market for pathogen inactivation of platelets and plasma in Switzerland is over $13 million. During the second quarter of 2007, the company signed a commercialization agreement with Grifols S.A. Grifols will distribute the INTERCEPT Blood System for platelets and plasma in Spain and Portugal. Interestingly, Grifols has its own methylene blue-based pathogen inactivation service business that may now be replaced by INTERCEPT. If possible, blood centers would prefer to have in-house pathogen inactivation capability and are moving away from centralized processing services like Grifols. We expect about $10 million in product sales in 2007, up from the $3 million in 2006.
The company has an agreement with BioOne in Tokyo for marketing the platelet system in Japan and parts of Asia. The company also has an agreement with BioOne to commercialize INTERCEPT for plasma, when marketable, in the same region. This agreement does not change with CERS taking over European and North American commercialization rights from Baxter. The company received $9.5 million milestone consideration (cash and stock) from BioOne in the fourth quarter 2006 for receiving European CE Mark approval for plasma. The commercialization effort however appears at risk given the write down in stock value and July 2007 equity refinancing of BioOne. CERS has no further performance obligations or any further deferred revenue to recognize from the BioOne agreement.
The company believes the market prefers a comprehensive pathogen inactivation program of all three major blood components (red blood cells, plasma, and platelets). As such, the company continues to work on its red blood cell inactivation process. As background, the company halted an earlier Phase III red blood cell program in 2003 after two patients developed antibodies. The company believes it has discovered the reason for the antibody development and has modified the process. A new Phase I study was designed to measure the viability of red cells prepared with the modified process. Later trials will be required to assess whether red cells treated with the modified process are therapeutically equivalent to conventional red cells on issues of safety and efficacy. The company is receiving Department of Defense funding for the Phase I program and is evaluating funding options beyond the Phase I study. However, interim Phase I data from the new study suggested the modified process shortens the life span of red blood cells by about 15%. The company believes it has corrected this additional problem and will re-start human testing in 2008. A Phase III study is now not expected to begin before 2009, later than the expected second half of 2008. The company could produce a comprehensive pathogen inactivation system as early as 2011, a launch date somewhat delayed from our earlier expectations given the continued development issues. The pathogen inactivation market is estimated to be over $3.5 billion worldwide, with the majority coming from red blood cells at an estimated $2.5 billion. If successful, the company's market opportunity increases dramatically. We are assuming less than 1% market penetration in 2011. However, assuming a comprehensive pathogen approval in Europe and the U.S., the company could achieve, in our opinion, revenues of $125-$135 million in 2011.
On top of the March 2006 equity offering (net proceeds were approximately $42.6 million), the company, quicker than expected, issued another 3.9 million shares (net proceeds about $24.3 million) in December 2006, helping near-term financing needs. As we had previously believed, the marketing effort and R&D expense level had been substantially underestimated. Nonetheless, we believe the company now has sufficient funding capabilities to continue the various INTERCEPT development costs. The multiple Phase I and Phase II clinical trials put a strain on CERS' ability to development and market the INTERCEPT system. The company's limited resources have been stretched since the company ended up with Baxter's marketing and commercialization rights to INTERCEPT. As a refresher, in the Baxter settlement, Baxter had the option to continue as the exclusive European marketing partner for INTERCEPT platelets and plasma but could decline by the contract deadline of February 2006. Baxter declined to continue its efforts and Cerus gained the exclusive European marketing rights for these products, as well as Baxter's North America platelets commercialization rights. Cerus had already gained worldwide rights for the red blood cells system and North American rights to the plasma system. While Baxter will continue to provide some technical service and regulatory support in Europe and manufacturing responsibilities through 2008, Cerus will provide sales and marketing support. Cerus had expressed past disappointment with the Baxter effort and Cerus believes they can, with re-gained direct control of the North American and European regulatory and sales effort, advance commercialization faster. As part of the change in marketing rights, Baxter will receive royalties of 10% on net platelets sales, 3% on net plasma sales, and 5% on any net red blood cell sales.
Outside of pathogen inactivation, and prior to the announced spinout in November 2007, the company had been focusing considerable resources on infectious disease and cancer vaccines. The company received a $3.8 million grant from the National Institute of Health (NIH) in 2004 to develop an anthrax vaccine utilizing the company's KBMA (Killed But Metabolically Active) technology. The company also received a $2.8 million 3-year contract in 2005 from the NIH using the KBMA technology to develop a vaccine against a bacterium that causes Tularemia. Tularemia (also known as rabbit fever) is a bacterial disease that can be transmitted to humans by contact with rabbits or other infected animals or possibly by inhalation of aerosolized bacteria. There is some concern that Tularemia could be deliberately released in an act of war or terrorism. The funding CERS is receiving is part of a $23 million research and development contract. The company also acquired intellectual property rights to Mesothelin, a cancer antigen, from Johns Hopkins University and Chugai Pharmaceuticals. Cerus licensed Mesothelin for cancer vaccine applications from Johns Hopkins and the DNA sequence of the antigen from Chugai Pharmaceuticals. Mesothelin is expressed predominantly in pancreatic and ovarian tumors. In December 2005, the company filed an IND (Investigational New Drug) application with the FDA to start a Phase I safety trial for its lead listeria-based compound vaccine, CRS-100, for colorectal cancer metastasized to the liver. The IND application was approved in the first quarter 2006 and the company started a Phase I clinical trial in the U.S in the second quarter 2006. Enrollment in the Phase I CRS-100 trial has gone slower than expected and, as of the fourth quarter 2006, the company established a second clinical site and developed a third clinical site to accelerate patient enrollment. During the third quarter 2007, the company enrolled another group of patients for CRS-100 Phase I trial. Given the slow enrollment, CRS-100 Phase I data is now expected in later 2008 or early 2009. CERS had initially planned plans to utilize the CRS-100 clinical safety data to streamline the design of the CRS-207 study. However, the company now plans to conduct independent clinical trials for CRS-207, has filed an IND, and hopes to begin enrolling patients in Q407. In April 2004, CERS entered into an agreement with MedImmune for the development of MEDI-543, based on their listeria platform and utilizing MedImmune's proprietary antigen (EphA2). EphA2 is expressed in a number of solid tumors including breast, prostate, colon cancers, and metastatic melanoma. Under the agreement, the company worked with MedImmune for preclinical development of a product candidate. MedImmune was responsible for clinical testing, manufacturing and commercialization of any product resulting from the collaboration. The company received an up-front payment of $1 million also received $0.5 million as development funding for preclinical development. CERS was also to receive development and commercial milestone payments and royalties on future product sales and an IND was expected to be filed in 2008. However, MedImmune was acquired by AstraZeneca Plc. in June, 2007 and, at September 30, 2007, the agreement between CERS and MedImmune was terminated, reducing the potential pipeline candidates and future value in the vaccines segment.
However, given little operational or developments synergies with the commercial stage pathogen inactivation business and the cash burn ($14 million expected in 2007 from the vaccines business) putting strains on INTERCEPT development, the company began looking at alternatives for the immunotherapy business in early 2007. The company negotiated to off-load costs and unlock value for the emerging biotechnology vaccine programs through potential partnering arrangements, combination with another public or private biotechnology firm, or a possible spinout of the business. In November 2007, the company off-loaded its immunotherapy business, including its Listeria and KBMA technologies, to a private equity consortium and received 15.5% as equity interest in the new company. As part of the divestiture, CERS will also get an additional $1.5 million, in the form of equity or in cash, from the new company. CERS is entitled to receive cash milestone payments in excess of $90 million and royalty payments in the future, subject to successful development and commercialization of the vaccine technologies realized from the displaced business. As a result of its spin-off, CERS will no longer support the operations of the immunotherapy business or any financial obligations associated with KBMA's contract (in pre-clinical stage) and other assets of this business.
Given the higher expenses expected as the company builds out a sales/marketing infrastructure and advances the pipeline, the company's annual cash burn will increase markedly in 2007. For 2007, CERS expects cash burn from operations of approximately $42 million, up considerably from 2006 levels.
The cash burn increase is due to the company's commercialization efforts for the INTERCEPT Blood System in Europe, delayed clinical study activities pushed into 2007, and an expected reduction in funding. Cash burn in 2008 and beyond is expected to decline with the spinout of the immunotherapy business. Our estimates reflect the improved financial position.
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