CERUS CORPORATION This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Operating results for the three and nine months endedSeptember 30, 2021 are not necessarily indicative of results that may occur in future periods. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that involve risks and uncertainties. The forward-looking statements are contained principally in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Item 1A, "Risk Factors." These statements relate to future events or to our future operating or financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These forward-looking statements may include, but are not limited to, statements about:
• the impact of the COVID-19 pandemic on our business and operations as well
as the business or operations of our customers, manufacturers, research
partners, and other third parties with whom we conduct business;
• future sales of and anticipated demand for, and our ability to effectively
commercialize and achieve market acceptance of the INTERCEPT™ Blood
System, including our ability to comply with applicable
U.S. , and foreign laws, regulations and regulatory requirements; • our ability to successfully complete the development of, receive
regulatory approvals for and commercialize the red blood cell system or
other plasma-derived biological products using the INTERCEPT Blood System;
• our ability to successfully commercialize
IFC, and pathogen reduced cryoprecipitate-poor plasma;
• our strategy and the potential therapeutic applications for the INTERCEPT
Blood System, including the potential of INTERCEPT-treated coronavirus
convalescent plasma as a therapeutic or prophylactic treatment option for
COVID-19 patients;
• our ability to manage the growth of our business and attendant cost
increases, including in connection with the commercialization of the
INTERCEPT Blood System in the
risks attendant to our international operations;
• the timing or likelihood of regulatory submissions and approvals and other
regulatory actions or interactions, including whether or not existing
clinical data will be sufficient in order to obtain approval of our CE
Mark submission for the red blood cell system;
• our ability to obtain and maintain regulatory approvals of the INTERCEPT
Blood System;
• our ability to obtain adequate clinical and commercial supplies of the
INTERCEPT Blood System from our sole source suppliers for a particular
product or component they manufacture;
• the initiation, scope, rate of progress, results and timing of our ongoing
and proposed preclinical and clinical trials of the INTERCEPT Blood
System;
• the successful completion of our research, development and clinical
programs and our ability to manage cost increases associated with
preclinical and clinical development of the INTERCEPT Blood System;
• the amount and availability of funding we may receive under our agreement
with the
• our ability to transition distribution of the INTERCEPT Blood System from
third parties to a direct sales model in certain international markets;
• the ability of our products to inactivate the emerging viruses and other
pathogens that we may target in the future, including SARS-CoV-2;
• our ability to protect our intellectual property and operate our business
without infringing upon the intellectual property rights of others;
• our estimates regarding the sufficiency of our cash resources, our ability
to continue as a going concern and our need for additional funding; and
• our plans, objectives, expectations and intentions and any other
statements that are not historical facts.
21
-------------------------------------------------------------------------------- In some cases, you can identify forward-looking statements by terms such as "anticipate," "will," "believe," "estimate," "expect," "plan," "may," "should," "could," "would," "project," "predict," "potential," and similar expressions intended to identify such forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. There can be no assurance that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on our business, results of operations and financial condition. Certain important factors could cause actual results to differ materially from those discussed in such statements, including the rate of customer adoption in theU.S. and our ability to achieve market acceptance of our products in theU.S. and international markets, whether our preclinical and clinical data or data from commercial use will be considered sufficient by regulatory authorities to grant marketing approvals for our products or for product extensions or additional claims for our products, our ability to obtain and maintain reimbursement approvals for our products, our ability to complete the development and testing of additional configurations or redesigns of our products, our need for additional financing and our ability to access funding under our agreement with BARDA, the impacts of regulation of our products by domestic and foreign regulatory authorities, our limited experience in sales, marketing and regulatory support for the INTERCEPT Blood System, our reliance on Fresenius and third parties to manufacture or supply certain components or compounds for the INTERCEPT Blood System, incompatibility of our platelet system with some commercial platelet collection methods, our need to complete our red blood cell system's commercial design, more effective product offerings by, or clinical setbacks of, our competitors, product liability, our use of hazardous materials in the development of our products, business interruption due to earthquake, our expectation of continuing losses, protection of our intellectual property rights, volatility in our stock price, on-going compliance with the requirements of the Sarbanes-Oxley Act of 2002 and other factors discussed below and under the caption "Risk Factors" in Item 1A of this Quarterly Report on Form 10-Q. We discuss many of these risks in this Quarterly Report on Form 10-Q in greater detail in the section entitled "Risk Factors" under Part II, Item 1A below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should read this Quarterly Report on Form 10-Q and the documents that we incorporate by reference in and have filed as exhibits to this Quarterly Report on Form 10-Q completely. Our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update or revise any forward-looking statements to reflect new information or future events, even if new information becomes available in the future. You should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.
Overview
Since our inception in 1991, we have devoted substantially all of our efforts and resources to the research, development, clinical testing and commercialization of the INTERCEPT Blood System. Our INTERCEPT Blood System is intended for use with blood components and certain of their derivatives, including plasma, platelets, and red blood cells. The INTERCEPT Blood System for platelets, or platelet system, and the INTERCEPT Blood System for plasma, or plasma system, have received CE Marks andU.S. Food and Drug Administration , or FDA, approval and are being marketed and sold in a number of countries around the world. Additionally, inNovember 2020 , we received FDA approval for the INTERCEPT Blood System for Cryoprecipitation, which uses our plasma system to produce IFC and its derivative product, pathogen reduced plasma, cryoprecipitate reduced. IFC is indicated for the treatment and control of bleeding, including massive hemorrhage, associated with fibrinogen deficiency. We currently sell both the platelet and plasma systems using our direct sales force and through distributors and plan to sell IFC directly to hospital customers in theU.S. using a direct sales force, though we may in the future sell INTERCEPT Blood System for Cryoprecipitation disposable kits to strategic blood centers that are not manufacturing partners for our distribution and sale of IFC. The platelet system is approved in theU.S. for ex vivo preparation of pathogen-reduced apheresis platelet components collected and stored in 100% plasma or InterSol in order to reduce the risk of transfusion-transmitted infection, or TTI, including sepsis, and as an alternative to gamma irradiation for prevention of transfusion-associated graft versus host disease or TA-GVHD. As part of theFDA's approval of the platelet system, we are required to successfully conduct and complete two post-approval studies - a haemovigilance study to evaluate the incidence of acute lung injury following transfusion of INTERCEPT-treated platelets; and a recovery study of platelets treated with the platelet system that is currently being discussed with FDA. The plasma system is approved in theU.S. for ex vivo preparation of pathogen-reduced, whole blood derived or apheresis plasma in order to reduce the risk of TTI when treating patients requiring therapeutic plasma transfusion, and as an alternative to gamma irradiation for prevention of TA-GVHD. 22 -------------------------------------------------------------------------------- The INTERCEPT Blood System for red blood cells, or the red blood cell system, is currently in development and has not been commercialized anywhere in the world. We filed our application for CE Mark approval of the red blood cell system inDecember 2018 under the Medical Device Directive, or MDD, and as ofJune 2021 , we have completed the resubmission of our application under the new European Medical Device Regulation, or MDR. We do not expect an approval decision for the next twelve months, if ever. In 2017, we initiated a Phase 3 clinical, double-blind study in theU.S. , known as the RedeS study, to assess the safety and efficacy of INTERCEPT-treated red blood cells when compared to conventional, red blood cells. Also in 2017, we received investigational device exemption, or IDE, approval from the FDA to initiate a Phase 3 clinical trial, known as the ReCePI study that is designed to evaluate the efficacy and safety of INTERCEPT-treated red blood cells in patients requiring transfusion for acute blood loss during surgery. Due to the COVID-19 pandemic, many of the hospital sites conducting our RedeS and ReCePI studies suspended enrollment to focus on their response to the pandemic. Should the COVID-19 pandemic persist or heighten, we could see renewed or further delays to trial enrollment. In addition, we will need to generate acceptable Phase 3 clinical data from chronic anemia patients in theU.S. before the FDA will consider our red blood cell system for approval. We also understand that one or more additional in vitro studies will be required to be successfully completed and submitted to the FDA. There can be no assurance that we will be able to successfully complete any such in vitro studies, nor can there be any assurance that we will successfully complete our Phase 3 trial in chronic anemia patients. In part, we will seek to introduce supplemental clinical data we obtained from European clinical trials, though we cannot assure you that we will be able to demonstrate comparability or that the FDA will allow supplemental clinical European data. We must demonstrate an ability to define, test and meet acceptable specifications for our current Good Manufacturing Practice and ISO standards for the manufactured compounds used to prepare INTERCEPT-treated red blood cells before we can submit and seek regulatory approval of our red blood cell system. The requirements apply to all suppliers providing raw materials, active ingredients, intermediates and final product. We do not yet know whether the data generated from our European Phase 3 clinical trials will be sufficient to receive CE Mark approval, even if limited to a target patient population having chronic anemia and, we may need to generate additional safety data from commercial use in order to achieve broader market acceptance. In addition, these trials may need to be supplemented by additional, successful Phase 3 clinical trials for approval in certain countries. If such additional Phase 3 clinical trials are required, they would likely need to demonstrate equivalency of INTERCEPT-treated red blood cells compared to conventional red blood cells and the significantly lower lifespan for INTERCEPT-treated red blood cells compared to conventional red blood cells may limit our ability to obtain any regulatory approvals in certain countries for the red blood cell system. As part of our development activities, we will need to successfully complete a number of in vitro studies prior to receiving any regulatory approvals inEurope and certain additional activities, including successfully completing the RedeS and ReCePI studies and an additional Phase 3 clinical trial for chronic anemia patients, including sickle-cell anemia patients, in theU.S. , prior to receiving any regulatory approvals in theU.S. Successful completion of these activities may require capital beyond that which we currently have or that may be available to us under our agreement with BARDA, and we may be required to obtain additional capital in order to complete the development of and obtain any regulatory approvals for the red blood cell system. In addition, if we are unable to obtain from our suppliers sufficient clinical quantities of the active compounds for our red blood cell system meeting defined quality and regulatory specifications, if our suppliers are not able to maintain regulatory compliance or if we experience additional delays in enrollment for the RedeS and ReCePI studies because of the COVID-19 pandemic or any other reason, we may experience delays in testing, conducting trials or obtaining approvals, and our product development costs would likely increase. InJune 2021 , we extended our agreement with BARDA, part of theU.S. Department of Health and Human Services' Office of the Assistant Secretary for Preparedness and Response, throughDecember 2023 . The agreement provides funding from BARDA to support the development of our red blood cell system, including clinical and regulatory development programs in support of potential licensure, and development, manufacturing and scale-up activities, as well as activities related to broader implementation of all three INTERCEPT systems in areas of emerging pathogens. The RedeS and ReCePI and other studies are being funded as part of our agreement with BARDA. Under the contract, BARDA reimburses us for allowable direct contract costs, as such costs are incurred, and for allowable indirect costs. See the discussion under "BARDA" below for more information. InNovember 2020 , we received FDA approval for the INTERCEPT Blood System for Cryoprecipitation. In the three months endedSeptember 30, 2021 , we have started selling IFC primarily to hospitals. The INTERCEPT Blood System for Cryoprecipitation uses our plasma system to produce IFC for the treatment and control of bleeding, including massive hemorrhage, associated with fibrinogen deficiency. We currently have agreements with certain blood center manufacturing partners and are actively working to identify additional partners to manufacture IFC. We are also working on implementing the infrastructure we believe will be necessary to market IFC directly to hospitals. Until our blood center manufacturing partners receive BLAs from the FDA, we will be limited to selling IFC in those states where our manufacturing partners are located. In addition, we may, in the future, sell the INTERCEPT Blood System for Cryoprecipitation disposable kits to strategic blood centers that are not our manufacturing partners for our distribution and sale of IFC. Accordingly, this dynamic may in turn create pricing pressures, distrust with our contracted blood center manufacturing partners and competition for hospital business. We have borrowed and, in the future, may borrow additional capital from institutional and commercial banking sources to fund future growth, including pursuant to our Credit, Security and Guaranty Agreement (Term Loan), or the Term Loan Credit Agreement, and our Credit, Security and Guaranty Agreement (Revolving Loan), or the Revolving Loan Credit Agreement, both withMidCap Financial Trust , or MidCap, as described below, or potentially pursuant to new arrangements with different lenders. We may borrow 23 -------------------------------------------------------------------------------- funds on terms that may include restrictive covenants, including covenants that restrict the operation of our business, liens on assets, high effective interest rates, financial performance covenants and repayment provisions that reduce cash resources and limit future access to capital markets. In addition, we expect to continue to opportunistically seek access to the equity capital markets to support our development efforts and operations. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration or partnering arrangements, we may be required to relinquish some of our rights to our technologies or rights to market and sell our products in certain geographies, grant licenses on terms that are not favorable to us, or issue equity that may be substantially dilutive to our stockholders. As a result of economic conditions, general global economic uncertainty, political change, and other factors, including uncertainty associated with the COVID-19 pandemic, we do not know whether additional capital will be available when needed, or that, if available, we will be able to obtain additional capital on reasonable terms. Specifically, the COVID-19 pandemic has significantly disrupted global financial markets, and may limit our ability to access capital, which could in the future negatively affect our liquidity. If we are unable to raise additional capital due to the volatile global financial markets, general economic uncertainty or other factors, we may need to curtail planned development or commercialization activities. In addition, we may need to obtain additional funds to complete development activities for the red blood cell system necessary for potential regulatory approval inEurope , if costs are higher than anticipated or we encounter delays. We may need to obtain additional funding to conduct additional randomized controlled clinical trials for existing or new products, particularly if we are unable to access any additional portions of the funding contemplated by our BARDA agreement, and we may choose to defer such activities until we can obtain sufficient additional funding or, at such time our existing operations provide sufficient cash flow to conduct these trials. Although we received FDA approval of our platelet and plasma systems inDecember 2014 , ourU.S. commercial efforts continue to be largely focused on enabling blood centers that are using INTERCEPT to optimize production and increase the number of platelet and plasma units produced and made available to patients and continuing to develop awareness of INTERCEPT's product profile relative to other platelet and plasma products, including conventional, un-treated components. In addition, to address the entire market in theU.S. , customers will need to modify their operating practices, or we will need to develop, test and obtain FDA approval of additional configurations of the platelet system. InSeptember 2019 , the FDA issued a final guidance document, "Bacterial Risk Control Strategies for Blood Collection Establishments and Transfusion Services to Enhance the Safety and Availability of Platelets for Transfusion." At the time it was issued, this guidance document required all blood collection facilities to comply with the options available under the guidance document, which includes the INTERCEPT Blood System, for all platelet collections, no later thanOctober 1, 2021 . Should we be unable to manufacture INTERCEPT in sufficient quantities in a timely manner, or have adequate resources to assist customers with implementing the INTERCEPT Blood System,U.S. blood centers may be forced to use alternate options allowed by the guidance document, which could permanently impact our ability to convert those blood centers to INTERCEPT users. Hospitals in regions seeing a surge in COVID-19 cases may disallow access to their sites or personnel which will delay our ability to market and sell our products, including IFC. Should the COVID-19 pandemic persist or heighten, customers may not be able to implement new technologies such as INTERCEPT and may instead choose to utilize other allowable methods with which they may have more familiarity. Outside of theU.S. , we recognize product revenues from the sale of our platelet and plasma systems in a number of countries around the world including those inEurope , the Commonwealth of Independent States, or CIS, and theMiddle East . We utilize both our direct sales organization and regional distributors to market and sell our platelet and plasma systems in these international markets. Our commercial efforts outside theU.S. are focused on increasing market adoption with our existing customer relationships and building demand in new geographies. Generally, we enter into customer agreements for a specified term and varying options or extensions beyond the initial term. We cannot assure that all customers will use our products at historical levels or at all since securing long-term purchase volume commitments is not always possible, given the unpredictable nature of blood collection and usage. We also cannot provide any assurance that we will be able to secure any subsequent contracts with our customers or that the terms, including the pricing or committed volumes, if any, of any future contract will be equivalent or superior to the terms under our current contracts. If we are unable to gain widespread commercial adoption in markets where our blood safety products are approved for commercialization, including theU.S. , we will have difficulties achieving profitability. In order to commercialize all of our products and product candidates, we will be required to conduct significant research, development, preclinical and clinical evaluation, commercialization and regulatory compliance activities for our products and product candidates, which, together with anticipated selling, general and administrative expenses, are expected to result in substantial losses. Accordingly, we may never achieve a profitable level of operations in the future. In addition to the anticipated product revenues from sales of our platelet and plasma systems and sales of IFC, we anticipate that we will continue to recognize revenue from our government contracts. We recognize government contract revenue associated with the government contracts as qualified costs are incurred for reimbursement over the performance period. 24 --------------------------------------------------------------------------------
Fresenius
Fresenius Kabi AG , or Fresenius, manufactures and supplies the platelet and plasma systems to us under a supply agreement, or the Supply Agreement. Fresenius is obligated to sell, and we are obligated to purchase, finished disposable kits for our platelet, plasma and red blood cell systems. The Supply Agreement permits us to purchase platelet, plasma and red blood cell systems from third parties to the extent necessary to maintain supply qualifications with such third parties or where local or regional manufacturing is needed to obtain product registrations or sales. Pricing terms are defined through 2021. In response to public health directives inFrance similar to local orders issued in theU.S. to respond to the COVID-19 pandemic, in 2020 Fresenius reconfigured production workflow to ensure employee safety and to comply with local requirements for social distancing and continues to operate under those local requirements. For a discussion of the risks presented to our supply chain by the COVID-19 pandemic, see "Item 1A-Risk Factors" in Part II of this Quarterly Report on Form 10-Q. See Note 10, Development and License Agreements, in Part I of this Quarterly Report on Form 10-Q for further information regarding the Supply Agreement with Fresenius. Government contracts InJune 2016 , we entered into an agreement with BARDA to support our development and implementation of pathogen reduction technology for platelet, plasma, and red blood cells, including access to funding that could potentially support various activities, including funding studies necessary to support a potential premarket approval application submission to the FDA for the red blood cell system, and acceleration of commercial scale up activities to facilitate potential adoption of the red blood cell system byU.S. blood centers. This agreement with BARDA provides for the reimbursement of certain amounts incurred by us in connection with our satisfaction of certain contractual milestones. Under the agreement, we are reimbursed and recognize revenue as qualified direct contract costs are incurred plus allowable indirect costs, based on approved provisional indirect billing rates, which permit recovery of fringe benefits, overhead and general and administrative expenses. As ofSeptember 30, 2021 , BARDA has committed to reimburse certain of our expenses related to the clinical development of the red blood cell system during a base period, or the Base Period, and under exercised option periods, or Option Periods, in an aggregate amount of up to$126.5 million . If we satisfy subsequent milestones and BARDA were to exercise additional Option Periods, the total funding opportunity under the BARDA agreement could reach up to$223.5 million throughDecember 31, 2023 . If exercised by BARDA in its sole discretion, each subsequent Option Period would fund activities related to broader implementation of the platelet and plasma system or the red blood cell system in areas of emerging pathogens, clinical and regulatory development programs in support of the potential licensure of the red blood cell system in theU.S. , and development, manufacturing and scale-up activities for the red blood cell system. We are currently responsible for co-investment of approximately$5.0 million , and would be responsible for an additional$9.6 million , if certain additional Option Periods are exercised by BARDA. See Note 10, Development and License Agreements, in Part I of this Quarterly Report on Form 10-Q for further information regarding the agreement with BARDA. InSeptember 2020 , we entered into a five-year agreement with the FDA for the development of next-generation compounds to optimize pathogen reduction treatment of whole blood to reduce the risk of transfusion-transmitted infections. Under the agreement, we are reimbursed and will recognize revenue as qualified direct contract costs are incurred plus allowable indirect costs, based on approved provisional indirect billing rates, which permit recovery of fringe benefits, overhead and general and administrative expenses. The total potential contract value is$11.1 million . See Note 13, Development and License Agreements, in Part I of this Quarterly Report on Form 10-Q for further information regarding the agreement with FDA.
Equity Agreements
See Note 7, Stockholders' Equity, in Part I of this Quarterly Report on Form 10-Q for further information regarding the Controlled Equity OfferingSM Sales Agreement withCantor Fitzgerald & Co. andStifel, Nicolaus & Company, Incorporated , or the Sales Agreement, for the issuance and sale of our common stock. Debt Agreement See Note 5, Debt, in in Part I of this Quarterly Report on Form 10-Q for more information on the debt under our Term Loan Credit Agreement and the Revolving Loan Credit Agreement. COVID-19 The current COVID-19 pandemic has affected and will continue to affect economies and business around the world. To date, various governmental authorities and private enterprises have implemented numerous measures to contain the pandemic, such as travel bans and restrictions, quarantines, shelter-in-place orders and non-essential business shutdowns, which have led to severe disruptions to the 25 -------------------------------------------------------------------------------- global andU.S. economies that may continue for a prolonged duration and has triggered a recession or a period of economic slowdown. We do not yet know the full extent of potential impacts on our product revenues, business operations, clinical trials, or overall financial projections. Should our employees, notably laboratory-based personnel, see a surge in infections, our ability to complete research and development activities may be impaired. As such, certain studies and trials may be delayed for an extended period of time. Furthermore, key deployment and technical service personnel, if infected, will not be able to support customers timely or effectively which could negatively impact our ability to support customers looking to begin INTERCEPT use or those experiencing any operational difficulties. The extent and duration of the pandemic is highly uncertain and difficult to predict. We are actively monitoring and managing our response and assessing actual and potential impacts to our operating results and financial condition, which could also impact trends and expectations as described in more detail below.
Critical Accounting Policies and Management Estimates
Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Results of Operations
Three and nine months ended
Revenue
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Product revenue $ 36,131 $ 23,607 $ 12,524 53 % $ 90,994 $ 63,721 $ 27,273 43 %
Government contract
revenue 5,970 5,584 386 7 % 18,436 16,938 1,498 9 %
Total revenue $ 42,101 $ 29,191 $ 12,910 44 % $ 109,430 $ 80,659 $ 28,771 36 %
Product revenue increased during the three and nine months ended September 30,
2021 , compared to the three and nine months ended September 30, 2020 , primarily
due to year-over-year sales volume growth in disposable platelet system kit
sales in the U.S. Also contributing to the increases was a strengthened Euro
compared to the U.S. dollar during the three and nine months ended September 30,
2021 , as compared to the three and nine months ended September 30, 2020 . We
anticipate product revenue for INTERCEPT disposable kits will increase in future
periods driven by the expected continued expansion of U.S. sales, increased
market acceptance of the INTERCEPT Blood System and adoption of the INTERCEPT
Blood System in geographies where commercialization efforts are underway. In
addition, we expect to see the impact of selling IFC to U.S. hospital customers
as demand for our new IFC product increases in future periods. However, a
deterioration of the Euro relative to the U.S. dollar has in the past, and could
in the future, have a material impact on our product revenues, as a significant
portion of our product revenue is expected to come from Euro denominated markets
over the near term. As a result of these and other factors, the historical
results may not be indicative of INTERCEPT Blood System product revenue in the
future.
Government contract revenue increased during the three and nine months ended
September 30, 2021 , compared to the three and nine months ended September 30,
2020 , primarily due to slightly increased activities under our government
contracts, resulting from the reimbursement of the direct and indirect contract
costs incurred under our government contracts. Given the ongoing effects that
the COVID-19 pandemic has on our BARDA funded activities, we do not anticipate
that government contracts revenue will materially change from historical trends.
Cost of Product Revenue
Our cost of product revenue consists of the cost of the INTERCEPT Blood System
sold, provisions for obsolete, slow-moving and unsaleable product, certain order
fulfillment costs, to the extent applicable and costs for idle facilities.
Inventory is accounted for on a first-in, first-out basis.
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Cost of product
revenue $ 17,582 $ 10,953 $ 6,629 61 % $ 44,000 $ 28,978 $ 15,022 52 %
Cost of product revenue increased during the three and nine months ended
26
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Our gross margin on product sales was 51% during the three months ended
September 30, 2021 , compared to 54% during the three months ended September 30,
2020 . Our gross margin on product sales was 52% during the nine months ended
September 30, 2021 , compared to 55% during the nine months ended September 30,
2020 . The decrease in gross margin on product sales was primarily due to
unfavorable product mix with U.S. customers primarily from platelet kits used to
produce a single therapeutic dose which contribute to a lower gross margin
percentage relative to platelet kits used to produce more than one therapeutic
dose. Changes in our gross margin on product sales are affected by various
factors, including the volume of product manufactured and the relative per unit
pricing in our Supply Agreement with Fresenius, the timing of inventory
purchases related to the underlying exchange rate of the Euro relative to the
U.S. dollar, manufacturing and supply chain costs, the mix of product sold, and
the mix of customers to which products are sold. We may encounter unforeseen
manufacturing difficulties, including those related to the COVID-19 pandemic,
which, at a minimum, may lead to higher than anticipated costs, scrap rates,
delays in manufacturing products, or lower production levels of manufacturing
than would be needed to meet demand. In addition, we may face competition which
may limit our ability to maintain existing selling prices for our products which
in turn would negatively affect our reported gross margins on product sales. Our
gross margins on product sales may be impacted in the future based on all of
these and other criteria.
We expect to build inventory levels that will be sufficient to meet forecasted
demand. While our suppliers have initiated business continuity plans with
minimal disruption to our supply, we cannot be certain that any prolonged,
intensified or worsened effect from the COVID-19 pandemic would not impact our
supply chain. At times, we may purchase quantities of materials, components or
finished products that are expected to be on-hand for longer than one year. We
may procure and carry this inventory to mitigate obsolescence, supply chain
disruption and for business continuity reasons.
Research and Development Expenses
Our research and development expenses include salaries and related expenses for
our scientific personnel, non-cash stock-based compensation, payments to
consultants, costs to prepare and conduct preclinical and clinical trials,
third-party costs for development activities, certain regulatory costs, costs
associated with our facility related infrastructure, and laboratory chemicals
and supplies.
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Research and
development $ 15,288 $ 15,921 $ (633 ) (4 %) $ 48,119 $ 47,349 $ 770 2 %
Research and development expenses decreased during the three months ended
September 30, 2021 , compared to the three months ended September 30, 2020 ,
primarily due to the decreased costs for our red blood cell program related to
the BARDA agreement. Research and development expenses increased during the nine
months ended September 30, 2021 , compared to the nine months ended September 30,
2020 , primarily due to preliminary design efforts on our illuminator, increased
costs associated with product enhancements and initiatives for expanded platelet
label claims, and costs for our red blood cell program, inclusive of activities
related to the BARDA agreement.
We expect to incur additional research and development costs associated with
planning, enrolling and completing our required post-approval studies for the
platelet system, pursuing potential regulatory approvals in other geographies
where we do not currently sell our platelet and plasma systems, planning and
conducting in vitro studies and clinical development of our red blood cell
system in Europe and the U.S. , completing activities to support our CE Mark
submission for our red blood cell system in Europe , new product development and
product enhancements, including potential new label claims, design efforts on
our illuminator, and costs associated with performing the activities under our
government contracts. Due to the inherent uncertainties and risks associated
with developing biomedical products, including, but not limited to, intense and
changing government regulation, the impact of global pandemics and natural
disasters, including the current COVID-19 pandemic, uncertainty of future
preclinical studies and clinical trial results and uncertainty associated with
manufacturing, it is not possible to reasonably estimate the costs to complete
these research and development projects. We face numerous risks and
uncertainties associated with the successful completion of our research and
development projects, which risks and uncertainties are discussed in further
detail under "Item 1A-Risk Factors" in Part II of this Quarterly Report on Form
10-Q.
27
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Selling, General, and Administrative Expenses
Selling, general, and administrative expenses include salaries and related expenses for administrative personnel, non-cash stock-based compensation, expenses for our commercialization efforts in a number of countries around the world including those inU.S. ,Europe , the CIS, and theMiddle East ,Asia ,Latin America , and expenses for accounting, tax, internal control, legal and facility and infrastructure related expenses, and insurance premiums. Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except percentages) 2021 2020 Change 2021 2020 Change Selling, general and administrative$ 20,357 $ 16,299 $ 4,058 25 %$ 59,285 $ 48,324 $ 10,961 23 % Selling, general, and administrative expenses increased during the three and nine months endedSeptember 30, 2021 , compared to the three and nine months endedSeptember 30, 2020 , primarily driven by stock-based and incentive compensation as well as investments associated with the commercial launch of IFC. Non-Operating Expense, Net
Non-operating expense, net consists of foreign exchange gains and losses, interest charges incurred on our debt, and other non-operating gains and losses, including interest earned from our short-term investment portfolio.
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Foreign exchange gain
(loss) $ (164 ) $ 490 $ (654 ) (133 %) $ (442 ) $ 540 $ (982 ) (182 %)
Interest expense (1,279 ) (930 ) (349 ) 38 % (3,589 ) (2,794 ) (795 ) 28 %
Other income, net 205 351 (146 ) (42 %) 998 962 36 4 %
Total non-operating
expense, net $ (1,238 ) $ (89 ) $ (1,149 ) 1,291
%
Foreign Exchange Gain (Loss)
We had foreign exchange losses during the three and nine months endedSeptember 30, 2021 , compared to foreign exchange gains during the three and nine months endedSeptember 30, 2020 . The changes are primarily due to less favorable foreign exchange variations between the Euro and theU.S. dollar.
Interest Expense
Interest expense increased during the three and nine months endedSeptember 30, 2021 , compared to the three and nine months endedSeptember 30, 2020 , primarily due to the higher underlying balance per our Term Loan Agreement, Tranche 2, of$15.0 million drawn onMarch 29, 2021 .
Other Income, Net
Other income, net decreased during the three months ended
Other income, net remained relatively flat during the nine months ended
Provision for Income Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except
percentages) 2021 2020 Change 2021 2020 Change
Provision for income
taxes $ 73 $ 68 $ 5 7 % $ 248 $ 192 $ 56 29 %
The tax expenses were primarily a result of our
Due to our history of cumulative operating losses, management has concluded that, after considering all of the available objective evidence, it is not likely that all our net deferred tax assets as ofSeptember 30, 2021 will be realized. Accordingly, substantially all of ourU.S. deferred tax assets continue to be subject to a valuation allowance as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , there have been no material changes to our total amount of unrecognized tax benefits. 28
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Liquidity and Capital Resources
In recent years, our sources of capital have primarily consisted of public issuance of common stock, debt instruments, and to a lesser extent, cash from product sales and reimbursements under our government agreements.
As ofSeptember 30, 2021 andDecember 31, 2020 , we had the following cash and cash equivalents, short-term investments and restricted cash (in thousands): September 30, 2021 December 31, 2020 Cash and cash equivalents $ 78,460 $ 36,594 Short-term investments 41,501 97,000 Restricted cash 2,278 2,309 Total $ 122,239 $ 135,903
Excess cash is typically invested in highly liquid instruments of short-term investments with high-quality credit rated corporate and government agency fixed-income securities in accordance with our investment policy.
As of
September 30, 2021 December 31, 2020
Debt - current $ 9,986 $ 8,516
Debt - non-current 54,675 39,588
Total $ 64,661 $ 48,104
Operating Activities
Nine Months Ended
(in thousands) September 30, 2021 September 30, 2020
Net cash used in operating activities $ (32,700 ) $ (32,910 )
The net cash used in operating activities remained relatively flat and, in the current period, reflects increased product sales and underlying gross profit, revenue from our BARDA agreement and the timing of payments, partially offset by increased inventory build during the nine months endedSeptember 30, 2021 , compared to the same period in 2020. We expect to continue to make investments in inventory ahead of our future forecasted demand and to ensure component availability and mitigate obsolescence, if any. Investing Activities Nine Months Ended (in thousands) September 30, 2021 September 30, 2020 Net cash provided by (used in) investing activities $ 52,978 $
(57,160 )
The change period over period was primarily the result of higher proceeds from the maturity and sale of our investments to support operations, during the nine months endedSeptember 30, 2021 , as compared to higher purchases of investments during the nine months endedSeptember 30, 2020 , from the proceeds associated with ourJanuary 2020 public offering of our common stock. Financing Activities Nine Months Ended (in thousands) September 30, 2021 September 30, 2020 Net cash provided by financing activities $ 22,196 $ 83,496 The decrease in net cash provided by financing activities for the nine months endedSeptember 30, 2021 , was primarily due to the net proceeds of approximately$62.7 million received from ourJanuary 2020 public offering of our common stock, and proceeds of approximately$13.9 million received from the shares sold under the Amended Cantor Agreement during the nine months endedSeptember 30, 2020 . This was partially offset by borrowings under our Term Loan Credit Agreement of$15.0 million during the nine months endedSeptember 30, 2021 . See Note 5, Debt, in Part I of this Quarterly Report on Form 10-Q for more information.
Working Capital
(in thousands) September 30, 2021 December 31, 2020
Working capital $ 113,335 $ 123,457
29
-------------------------------------------------------------------------------- Working capital decreased as ofSeptember 30, 2021 , compared toDecember 31, 2020 , primarily due to continued overall use of cash from operations to support the increased costs associated with product enhancements, initiatives for expanded platelet label claims, preliminary design efforts on our illuminator, and investments associated with the commercial launch of IFC, offset by proceeds from increased product sales and collections, proceeds from the shares issuance in the prior year, and the proceeds from the borrowing under our Term Loan Credit Agreement, during the nine months endedSeptember 30, 2021 .
Capital Requirements
Our near-term capital requirements are dependent on various factors, including operating costs and working capital investments associated with developing and commercializing the INTERCEPT Blood System, including in connection with the continuingU.S. commercialization of our platelet and plasma systems and the commercial launch of IFC, costs to develop different configurations of existing products and new products, including our illuminator, costs associated with planning, enrolling and completing ongoing studies, and the post-approval studies we are required to conduct in connection with the FDA approval of the platelet system, costs associated with pursuing potential regulatory approvals in other geographies where we do not currently sell our platelet and plasma systems, costs associated with conducting in vitro studies and clinical development of our red blood cell system inEurope and theU.S. , costs associated with performing the agreed-upon activities under our government agreements, and costs related to creating, maintaining and defending our intellectual property. Our long-term capital requirements will also be dependent on the success of our sales efforts, competitive developments, the timing, costs and magnitude of our longer-term clinical trials and other development activities, required post-approval studies, market preparedness and product launch activities for any of our product candidates and products in geographies where we do not currently sell our products, and regulatory factors. Until we are able to generate a sufficient amount of product revenue and generate positive net cash flows from operations, which we may never do, meeting our long-term capital requirements is in large part reliant on access to funds under our government contracts and the public and private equity and debt capital markets, as well as on collaborative arrangements with partners, augmented by cash generated from operations, if at all, and interest income earned on the investment of our cash balances. While we believe that our available cash and cash equivalents and short-term investments, as well as cash received from product sales and under our agreement with government contracts, will be sufficient to meet our capital requirements for at least the next 12 months, if we are unable to generate sufficient product revenue, or access sufficient funds under our government contracts or the public and private equity and debt capital markets, we may be unable to execute successfully on our operating plan. We have based our cash sufficiency estimate on assumptions that may prove to be incorrect. If our assumptions prove to be incorrect, we could consume our available capital resources sooner than we currently expect or in excess of amounts than we currently expect, which could adversely affect our commercialization and clinical development activities. We have borrowed and in the future may borrow additional capital from institutional and commercial banking sources to fund future growth, including pursuant to the Term Loan Credit Agreement and Revolving Loan Credit Agreement, or potentially pursuant to new arrangements with different lenders. We may borrow funds on terms that may include restrictive covenants, including covenants that restrict the operation of our business, liens on assets, high effective interest rates, financial performance covenants and repayment provisions that reduce cash resources and limit future access to capital markets. In addition, we expect to continue to opportunistically seek access to the equity capital markets to support our development efforts and operations. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. To the extent that we raise additional funds through collaboration or partnering arrangements, we may be required to relinquish some of our rights to our technologies or rights to market and sell our products in certain geographies, grant licenses on terms that are not favorable to us, or issue equity that may be substantially dilutive to our stockholders. InDecember 2020 , we entered into the Sales Agreement under which we may issue and sell up to$100.0 million of our common stock through or toCantor Fitzgerald & Co. orStifel, Nicolaus & Company, Incorporated , as sales agent or principal. To date, we have not sold any shares of our common stock under the Sales Agreement. While we expect to receive significant funding under our agreement with BARDA, our ability to obtain the funding we expect to receive under this agreement is subject to various risks and uncertainties, with respect to BARDA's ability to terminate the agreement for convenience at any time and our ability to achieve the required milestones under this agreement, including with respect to the conduct of the RedeS and ReCePI studies, enrollment for which has been suspended or slowed at many of the hospital sites due to the COVID-19 pandemic. In addition, access to federal contracts is subject to the authorization of funds and approval of our research plans by various organizations within the federal government, including theU.S. Congress . The general economic environment and uncertainty associated with the COVID-19 pandemic, coupled with tight federal budgets, has led to a general decline in the amount available for government funding. If BARDA were to eliminate, reduce or delay funding under our agreement, this would have a significant negative impact on the programs associated with such funding and could have a significant negative impact on our revenues and cash flows. Furthermore, should we be unable to deploy personnel or derive a benefit from fixed study costs or generate data from clinical sites and studies reimbursed by BARDA, our cash flows would be negatively impacted or we may have to initiate furloughs and layoffs which would likely prove disruptive to our management and operations. In addition, if we are unable to generate sufficient prerequisite Phase 3 clinical data, our agreement with BARDA will be severely limited in scope or could be terminated altogether, and our ability to complete the development activities required for licensure in theU.S. may require additional capital beyond which we currently have. Furthermore, while BARDA has provided funding for and has indicated a potential for future 30 -------------------------------------------------------------------------------- funding for many activities associated with combating COVID-19, the availability and focus for any BARDA funding will likely be finite and may require us to compete with other technologies, both similar and disparate. If alternative sources of funding are not available, or if we determine that the cost of alternative available capital is too high, we may be forced to suspend or terminate development activities related to the red blood cell system in theU.S.
We do not currently enter into any hedging contracts to normalize the impact of foreign exchange fluctuations. As a result, our future results could be materially affected by changes in these or other factors.
As a result of economic conditions, general global economic uncertainty, political change, global pandemics, natural disasters, and other factors, we do not know whether additional capital will be available when needed, or that, if available, we will be able to obtain additional capital on reasonable terms. If we are unable to raise additional capital due to the volatile global financial markets, general economic uncertainty or other factors, we may need to curtail planned development or commercialization activities. Specifically, the COVID-19 pandemic has significantly disrupted global financial markets, and may limit our ability to access capital, which could in the future negatively affect our liquidity. A recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. In addition, we may need to obtain additional funds to complete development activities for the red blood cell system necessary for potential regulatory approval inEurope , if costs are higher than anticipated or we encounter delays. We may need to obtain additional funding to conduct additional randomized controlled clinical trials for existing or new products, particularly if we are unable to access any additional portions of the funding contemplated by our government agreements, and we may choose to defer such activities until we can obtain sufficient additional funding or, at such time, our existing operations provide sufficient cash flow to conduct these trials.
Commitments and Off-Balance Sheet Arrangements
Off-balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Contractual Commitments
See Note 5, Debt, in Part I of this Quarterly Report on Form 10-Q for more information on the debt under our Term Loan Credit Agreement and the Revolving Loan Credit Agreement.
See Note 6, Commitments and Contingencies, in Part I of this Quarterly Report on Form 10-Q for more information on the operating leases and purchase commitments.
Financial Instruments
Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio to assist us in funding our operations. We currently invest our cash and cash equivalents in money market funds and interest-bearing accounts with financial institutions. Our money market funds are classified as Level 1 in the fair value hierarchy, in which quoted prices are available in active markets, as the maturity of money market funds are relatively short and the carrying amount is a reasonable estimate of fair value. Our available-for-sale securities related to corporate debt andU.S. government agency securities are classified as Level 2 in the fair value hierarchy, which uses observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. We maintain portfolio liquidity by ensuring that the securities have active secondary or resale markets. We did not record any credit losses during the three and nine months endedSeptember 30, 2021 and 2020. Adverse global economic conditions have had, and may continue to have, a negative impact on the market values of potential investments.
New Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies, in Part I of this Quarterly Report on Form 10-Q for more information on new accounting pronouncements.
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