Cerus Corporation (NASDAQ: CERS) is based on Concord, California and is engaged in the field of blood transfusion safety.
(Cerus Corp.: common stock price chart, from TC2000)
What is the problem?
Blood transfusion products is a large market worldwide. A number of pathogens including various bacteria, viruses, and parasites can be transmitted through blood transfusions. To avoid this blood-borne pathogen transmission, extensive blood testing is conducting before transfusion. Some of these tests like bacterial cultures can take few days to come back, thus causing a delay in transfusion in cases that need an emergent transfusion, e.g. massive bleeding or very low platelet count that may increase the risk of bleeding. In spite of these precautions, transmission of many pathogens still occurs during transfusion and may even be a medical liability. Accurate and fast tests are not even available against many blood-borne infection pathogens.
The company’s solution:
The company’s lead product is the INTERCEPT Blood System which inactivates a broad range of bacteria, viruses, and parasites that may be present in the donor’s blood. The list of pathogens against which INTERCEPT system is active is broad and includes hepatitis B and C, HIV, West Nile virus and bacteria, and emerging pathogens like Chikungunya, malaria, and dengue. The INTERCEPT Blood System has shown robust inactivation for bacteria, offering a mean log reduction between 4.5 and >10.6. It has shown its usefulness in various epidemic outbreaks in the French island of Réunion, Guadeloupe, Martinique, French Polynesia and Puerto Rico where the use of this system allowed local blood collection to continue without any problems of pathogen transmission.
How Cerus was founded:
Cerus was founded in 1991. The co-founder, Dr. Laurence Corash, PhD (who is also the Chief Scientific Officer) was inspired by the HIV outbreak in San Francisco in 1982. At that time, the virus was not even identified and there was no way to test for it in transfused blood products. His story can be heard in this video.
Mechanism of action of the INTERCEPT system:
The INTERCEPT Blood System uses a special molecule called amotosalen hydrochloride to irreversibly block the replication of DNA and RNA, thus preventing the proliferation of susceptible pathogens. Amotosalen is a part of psoralen group of photoactive compounds and is activated by ultraviolet A light. Once inside a pathogen, amotosalen docks in between the nucleic acid base pairs. Upon illumination with ultraviolet A (UVA) light, an interstrand crosslink is formed, ‘locking’ the DNA or RNA together so that it can no longer replicate. Platelets and plasma are not affected by the process. Amotosalen is removed through a process prior to transfusion. See this video for more details on how amotosalen works. At the molecular level. Another video on the whole process of using the INTERCEPT system for pathogen inactivation can be viewed here.
(Crosslinking of DNA by amotosalen)
INTERCEPT Plasma System:
Fresh frozen plasma is transfused to replace clotting factors in certain cases of life-threatening bleeding, e.g. due to liver disease or anticoagulant use. Use of the INTERCEPT plasma system allows cost savings by avoiding pathogen diagnosis testing. In addition, the system also maximizes efficiency by pooling five whole-blood plasma units to produce six INTERCEPT-treated plasma units.
It is FDA approved in the U.S., Europe, the Commonwealth of the Independent States, the Middle East and selected other countries.
INTERCEPT Platelet System:
About 1 in 1,500 platelet units is estimated to contain bacteria, even after culture detection, translating to a 1 in 250 per patient risk. INTERCEPT Blood system allows for cost savings by avoiding pathogen detection tests. Only 40-45% of double platelet collections meet requirements for pathogen reduction treatment. It also had other advantages like the harvesting of fresher platelets, avoiding gamma radiation to prevent transfusion-associated graft versus host disease (TA-GvHD). The therapeutic efficacy and safety of platelets treated with INTERCEPT Blood System have been demonstrated in 10 randomized clinical trials and through different hemovigilance programmes evaluating >390.000 platelet transfusions. It is compatible with platelets produced through apheresis and whole blood collections, those stored in 100% plasma, and those stored in plasma and additive solutions. The novel double dose buffy coat platelet production process saves costs in the process of platelet production. The approximate savings were Euro 25-60 per platelet unit by the increased shelf life of platelets and another Euro 20-30 per platelet unit by avoiding gamma irradiation and pathogen testing. INTERCEPT Blood system has market dominance in Europe in platelet pathogen inactivation and is used in more than 87% cases.
The following figure summarizes the results of a program implemented by the University of California, San Diego Medical Center to adopt pathogen-reduced platelets in their system.
The following figures summarize the findings of another study done at an 1100-bed U.S. academic medical center after the implementation of the INTERCEPT platelet system.
It is FDA approved in the U.S (in few indications)., Europe, the Commonwealth of the Independent States, the Middle East and selected other countries. It is the only pathogen inactivation/reduction method for platelets that is approved in the U.S., Germany, France, and Switzerland. Additional studies enabling label expansion in the U.S. are ongoing.
(Timeline of INTERCEPT Plasma and Platelets Systems approval in various countries since 2002)
It has Breakthrough device designation from FDA. Cryoprecipitate is a blood product which is transfused to control massive bleeding due to fibrinogen deficiency. Conventional cryoprecipitate is stored frozen and must be used within 4-6 hours after thawing or discarded. The proposed shelf life for INTERCEPT cryoprecipitate is 5 days at the room temperature and would enable greater availability of the product and facilitate its ease of use.
INTERCEPT Red Blood Cell System: potential $4 billion annual revenue opportunity:
It is under development but represents the largest target market opportunity for the company considering a large number of red blood cell transfusions globally.
Ongoing ReCePI trial: This phase 3 trial is evaluating the efficacy and safety of INTERCEPT Blood System for red blood cells in patients with acute blood loss after complex cardiac surgery procedures. The first patient was enrolled in December 2018. The expected enrollment is 600 patients in 20 sites. It is being funded partly by BARDA (Biomedical Advancement Research and Development Authority). The company will also conduct an additional phase 3 clinical trial in chronic anemia, including sickle cell disease before applying for U.S. regulatory approval.
CE Mark submission was completed for INTERCEPT RBC system in the E.U. in December 2018 based on two successful European phase 3 trials. The timeline for the regulatory approval application review is 15 months, so I expect a decision in the first half of 2020. This could be a big price moving event for the company’s stock.
- A separate HCPCS code was granted for third-party billing and reimbursement of INTERCEPT platelets and plasma in H1, 2017 which will enable wide adoption of the system.
- Cerus has partnered with the University Hospital of Geneva and Swiss Red Cross for adopting INTERCEPT’S Blood system in Africa.
- FDA is preparing guidance for platelet transfusion: either test for bacteria (needs more than 24 hours) and a secondary test for pathogen detection at days 4-5. The guidelines are expected to be finalized in 2019. The guidelines will encourage wider adoption of INTERCEPT Blood system since there is no need for waiting for pathogen detection tests to come back when platelet transfusion is urgently needed.
- Red Cross is increasingly adopting INTERCEPT blood system for platelets pathogen reduction.
- In Europe, only 20% of all platelets transfusions are secured by pathogen inactivation. In the studies done so far, approx. 40%-45% of all platelet transfusions are candidates for pathogen reduction. Thus, there is a potential for doubling the current market penetration in Europe.
- More countries like France, Switzerland, Belgium, Iceland, Kuwait, and Qatar have decided to inactivate 1005 of their produced platelets, thus expanding the potential market opportunity for the INTERCEPT system.
- Approval of INTERCEPT Blood system in the U.S. and E.U. will be the biggest step forward for the company since RBC transfusions represent the biggest transfusion products market. Approx. 25 million red blood cell transfusions were done in Europe, Africa and the Middle East per year.
- All U.S. Navy blood donor centers were required to adopt the use of pathogen reduced apheresis platelets by year end 2018. INTERCEPT is the only FDA approved pathogen reduction system in the U.S. to treat platelets.
The CEO worked in marketing and business development at Baxter. He is also on the Board of Directors at Aduro (NASDAQ: ADRO). Recently, William Moore, who earlier served as the VP of Lab Operations at Quest Diagnostics ad SVP of Operations and Biomedical Services at American Red Cross joined as the SVP of Manufacturing Operations and Supply Chain for Cerus.
Cash reserves were $119 million at the end of Q3, 2018. Net operating cash use was $24.2 million for 9 months ending Q3, 2018. The last equity offering raised $50 million in January 2018. I don’t expect any urgent need for capital raise for the next 12 months. Long-term debt was $24.1 million.
2018 revenue was $60.9 million, higher than the guidance. The annual revenue growth rate was 43%. The gross margin on product sales was 47%. FY 2019 revenue guidance is $70 million-$73 million.
Target market size:
The global market for products used for collecting, typing, preparing and transfusing blood products and sale of blood therapeutics was expected as $45 billion in 2015 (76% sales are in the U.S. and Europe). Global blood products market size is approx. $ 6 billion annually. Approx. 1.3 million platelet transfusions are done in Europe annually. INTERCEPT Plasma and Platelets is approx. $ 1 billion annual revenue opportunity. The big opportunity is the upcoming potential approval of INTERCEPT RBC system since RBC transfusions are a $5 billion annual revenue opportunity in the U.S. and E.U. per company estimates. Approx. 12 million-16 million RBC transfusions are done just in the U.S. annually.
The liquidation value is approx. $80.25 million. Net operating loss carryforwards value is approx. $150 million.
Revenue forecast using Excel (represents estimated revenue from INTERCEPT plasma and platelet systems only based on last 3 years of revenue growth) is shown in the figure below.
Using this forecast, I estimate $140 million in 2025 revenue from just INTERCEPT Plasma and platelet systems.
The big opportunity on the horizon is the European approval of INTERCEPT RBC system, which is expected to target approx. $2 billion annual revenue opportunity. Cerus has shown success in both phase 3 studies required for the current European regulatory application, so I assign approx. 90% probability of the product reaching the European market. I expect INTERCEPT to gain at least 20% of this market by 2025, thus adding $400 million in additional revenue. For U.S. market, I assign 60% probability of reaching the market at this stage and expect the product to be launched in 2023 and reach peak $400 million sales (20% of the market) by 2028. My forecast for peak 2028 sales from these 3 revenue streams is:
- The European market, INTERCEPT RBC system: $438 million ($394M when risk-adjusted): 2028
- U.S. market, INTERCEPT RBC system: $400 million ($240M when risk-adjusted), 2028
- INTERCEPT plasma and platelets, global= $153 million
Total estimated risk-adjusted peak revenue in 2028= $787 million
The estimated value of operations from the above indications using price/sales=4 and cost of capital of 10% = $1.21 billion
Adding a liquidation value of $80.25 million and NOLs of $150 million, my estimate for the fair value of equity is $1.44 billion. Using diluted stock count, my estimate for the fair value per share is $10.75/share or 63% upside potential.
The current market cap is approx. $903 million.
Well-known institutional investor Baker Brothers own a 7.9% stake in the company (10.7 million shares). ARK Innovation ETF (one of the best performing recent ETFs) owns a 5.04% stake or 6.7 million shares.
- European regulatory decision for INTERCEPT RBC system is expected in the first half of 2020.
- The ongoing phase 3 trial for INTERCEPT RBC system in the U.S. is expected to be completed in the second half of 2020. The data could be available by Q4, 2020 or Q1, 2021.
The stock has run up recently from a 52-week low of $4.90 at the end of December 2018 to $6.60 as of 2/22/2019, climbing 35% in just 2 months. The stock is also overbought on the daily chart and may see a short-term pullback to approx. $6.30 level. I would use any near-term pullback (which could occur if the rest of the market also pulls back) to initiate a starting position in the stock. I plan to allocate 1%-2% of capital to this investment opportunity buying in 25% increments.
Adverse events may be seen with INTERCEPT Blood system, for example, rare cases of acute respiratory distress syndrome, hypersensitivity to Amotosalen, and cardiac events like angina pectoris, etc. although no cases of myocardial infarction or death were seen. Patients still need to closely monitored during the process for any cardiac events. There is competition from a few other companies in blood product pathogen inactivation e.g. Grifolis, Octapharma, Macropharma, and Terumo. In the U.S. Octapharma also has approval for pathogen reduction in plasma. A Japanese company, Terumo is also developing an RBC pathogen reduction system and is conducting clinical trials for its European approval. INTERCEPT system has shown limited activity against certain pathogens like hepatitis A and E viruses and parvovirus. Its activity against Ebola virus is also unknown.
INTERCEPT RBC system which forms a major part of the valuation above is not approved yet. There is no guarantee that it will be approved in Europe despite successful phase 3 studies. The company will most likely conduct another phase 3 trial in chronic anemia patients in the U.S. before applying for U.S. approval. There is no guarantee that the FDA will approve the INTERCEPT RBC system. The company may also likely to require significant amounts of additional capital for the development and approval of INTERCEPT RBC system and further commercialization of INTERCEPT platelet system in the U.S. This may put downward pressure on the stock and result in shareholder dilution.
This article represents my own opinion and is not a substitute for professional investment advice. It does not represent a solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment. Investing in equities, especially biotech stocks has the risk of significant losses and may not be suitable for all investors. While the sources of information and data in this article have been checked, their accuracy cannot be completely guaranteed.
I am/we are long CERS.