Good day, ladies and gentlemen. Thank you for standing by and welcome to the Cerus Corporation’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jessica Hanover, Cerus' Vice President of Corporate Affairs. Dr. Hanover, you may begin.

Thank you and good afternoon. I'd like to thank everyone for joining us today. As part of today's webcast, we are simultaneously displaying slides that you can follow. You can access the slides from the Investor Relations website at ir.cerus.com. With me on the call are Obi Greenman, Cerus' president and Chief Executive Officer; Vivek Jayaraman, Cerus's Chief Operating Officer; Kevin Green, Cerus' Chief Financial Officer; Dr. Nina Mufti, Cerus' Vice President of Development and Red blood Cell Program Leader; Dr. Richard Benjamin, Cerus' Chief Medical Officer, dr. Laurence Corash, Cerus' Chief Scientific Officer and Carol Moore, Cerus' senior Vice President of Regulatory Affairs and Quality. Cerus issued a press release today announcing our financial results for the second quarter ended June 30th, 2023, and describing the company's recent business highlights. You can access a copy of this announcement on the company website at www.cerus.com. I'd like to remind you that some of the statements we will make on this call related to future events and performance rather than historical facts and are forward-looking statements. Examples of forward-looking statements include those related to our future financial and operating results, including our updated 2023 product revenue guidance, expected operating expense savings, our adjusted EBITDA goal and future operating expenses, as well as our commercial development efforts, expected future growth and our growth strategy, future product sales, potential product launches, ongoing and future clinical trials ongoing and future product development, and our regulatory plans and initiatives and related expectations, including the timing of these events and activities. These forward-looking statements involve risks and uncertainties that could cause actual events, performance and results to differ materially. They are identified and described in today's press release and under Risk Factors in our form 10-Q for the quarter ended June 30th, 2023, which we will file shortly. We undertake no duty or obligation to update our forward-looking statements. on today's call, we will also be discussing non-GAAP financial measures, including non-GAAP adjusted EBITDA. These non-GAAP measures should be considered a supplement to and not a replacement for measures presented in accordance with GAAP. For a reconciliation of non-GAAP financial measures to the most comparable GAAP financial measures, please refer to today's press release. We'll begin today with opening remarks from Obi, followed by Vivek to discuss recent business highlights and Kevin to review our financial results and expectations for 2023. And now, it's my pleasure to introduce Obi Greenman, Cerus's president and Chief Executive Officer.

Thank you, Jessica and good afternoon, everyone. Today, I would like to begin the call with a commentary about the progress we have made in Q2 across our full intercept portfolio, combined with the ongoing expansion of our commercial business. While significantly during the second quarter, we gained new visibility into the European and U.S. timelines for our INTERCEPT Red Blood Cell program. in the EU, as you will recall, we previously received questions from our competent authority CBG, MEB, or MEB as part of our overall MBR process for our EU submission for CE Mark approval. due to the workload for regulatory authorities associated with the new MBR process for device approvals in the EU, it was late June when we were able to have a clarification meeting with MEB to review our strategy for addressing their questions. The meeting was very positive and confirmed our approach for addressing MEB's questions is sound and on point. Based on the discussion of this meeting, we expect the MEB will accept our comprehensive responses to their questions in Q4 of this year. Assuming no further issues are identified by MEB, we expect them to prepare a positive opinion, which they will provide to our notified body, TUV in the first half of next year. Through the MDR process, because the TUV has already completed its initial review of all modules of our submission, we would then expect a CE Mark approval decision in the second half of 2024, which if approved, would enable the rollout of the product associated with a requisite hemovigilance program at multiple sites across Europe. Also in June, we held a Scientific Advisory Board Meeting for INTERCEPT red blood cells with leaders in the field of transfusion medicine. During this meeting, we gained valuable insights into existing…

Thank you, obi and good afternoon to everyone joining on today's call. As reported in our press release earlier today, our total product revenue for the second quarter of 2023 was up significantly from the first quarter, showing sequential growth of 25%. within the quarter, we experienced an impact on our U.S. customer ordering patterns associated with a temporary reduction in the FDA approved shelf life for INTERCEPT platelet kits. Due to a recent component change, the FDA required six-month shelf life for the kits, which led to customers rebalancing their inventory levels in order to minimize obsolescence. We did not see any reduction in share during the period, but the efforts to right size inventory levels did affect ordering patterns. This shelf-life issue is unique to the U.S. market, because the other regulatory bodies in Europe and elsewhere did not see the need for real-time stability studies for this component change to the kit. We are actively pursuing a regulatory filing plan to be submitted to the FDA later this year, designed to extend the kit shelf life to nine months within the first quarter of 2024 and then follow with further improvements in shelf-life dating quarterly throughout the remainder of next year. We believe this will alleviate the impact on customers and allow normal ordering patterns to resume, supporting our expected return to growth. Looking at the overall U.S. market, intercept treated platelets continue to be a leading choice for patient transfusion safety, and we have many strong blood center partners, who are or are on the way to becoming 100% patched and reduced platelet producers. The recent FDA guidance on production of cold-stored platelets for patients with active bleeding includes an option for preparation with INTERCEPT, providing added manufacturing flexibility to our customers with extension to 14…

Thanks, Vivek and good afternoon, everyone. Today, I will be discussing our financial results for the second quarter, our product revenue guidance for the year and our progress on the levers we have and we’ll continue to utilize as we work towards reaching adjusted EBITDA breakeven by the end of this year. we posted second quarter 2023 product revenue of $38.9 million, representing a year-over-year decrease of 5%, primarily due to the factors noted by Vivek earlier. in the U.S., product revenues were slightly down by 5% year-over-year. but sequentially, we saw a significant step-up from Q1 of 45%, confirming our earlier expectations that the business would begin to see a rebound to more historical levels of growth. In EMEA, product revenues were down 9% year-over-year and 4% sequentially. year-over-year, FX rates provided a slight benefit of around 800 basis points. In addition to our product revenue and not included in our guidance, government contract revenue totaled $8.9 million in Q2, compared to $6.6 million for the prior-year period. Included in our government contract revenue are the revenues recognized as reimbursement under our contract with BARDA, our agreement with the FDA to further whole blood pathogen reduction and our agreement with the U.S. Department of Defense for lyoIFC. As noted in our earnings release, we are pleased that during Q2, the DoD has agreed to increase the funding and scope of this program, and awarded us with an additional $8.7 million, bringing the total contract value to $17.8 million. Turning now to our product gross profit and gross margins. our second quarter product gross profit was $21.3 million, consistent with the prior-year period. product gross margins for the quarter were 54.9%, a 300-basis point increase versus the prior-year period and generally stable from Q1. Moving on, our second quarter operating…

Thank you. [Operator Instructions] Our first question comes from the line of Jacob Johnson of Stephens. Your line is now open. Our first question comes from the line of Jacob Johnson of Stephens. Jacob, your line is now open.

Hey. Sorry, I was on mute. Good afternoon, everybody. Apologies. Maybe, first just on the $5 million reduction in guidance, can you just talk through how much of that is related to the inventory and how much of that's related to Europe? Can you hear me, guys?

Yes, we can hear you now. Thanks.

I’m sorry about that. Yes. Sorry, just the $5 million change in guidance, can you just flush that out in terms of how much of that's related to U.S. inventories and then how much of that's related to Europe, et cetera?

Yes, thanks. Vivek, do you want to handle that?

Sure, I'd be happy to. The main component of that is related to the readjustment of inventories in the U.S. associated with the reduced shelf life. I'm not sure whether we break out specifically by Europe versus the U.S. But that certainly was the main headwind we faced in the first half of the year, which now that we've seen normalized ordering patterns, it's what leads to our confidence to realize growth in the back half of the year, but that's kind of where the majority of it comes from.

Okay. that's helpful. Thanks, Vivek. And then, Kevin, just on the $10 million of cost savings, you expect to realize, can you kind of help us understand how much of that's maybe coming out of COGS versus SG&A as we think about modeling that?

Yes. First, I'll answer that directly, but I wanted to correct something in the prepared remarks. The FX impact that we realized was 80 basis points, 0.8% rather than 800. So, I apologize for that. We had a typo. But to answer your question specifically, we don't expect that the savings is going to come from COGS, it's going to come from operating expenses and it's going to come from both R&D and SG&A. So on an annualized basis, after we cease use of some of our real estate, we do expect that we'll see at least $10 billion of annualized savings.

Okay, great. Thanks, Kevin. I'll leave it there.

All right. Thank you.

Thanks.

Thank you. Please stand by for our next question. Our next question comes from the line of Matt Blackman of Stifel. Your line is now open.

Good afternoon, everybody. Can you hear me, okay?

Yes, we can hear it.

We can hear you. Can you hear us?

Great. I can hear you.

Okay.

Yes, just checking. I know. Well, thanks for taking the question, or questions. maybe to start and Vivek, I just was hoping you could maybe expand a little bit more on your reply to that question. I think you commented about seeing a return to normalized ordering patterns. I think maybe, the back half of the quarter, maybe early here in the third quarter, could you just sort of expand on that a little bit and sort of again, why that gives you confidence that the issues that you saw here in the second quarter are sort of largely behind you. And then I've got a couple of follow-ups.

Yes. sure, I'd be happy to certainly welcome obi And Kevin Green as well. The single largest reason for confidence has to do with the fact that we saw no degradation of share. And so really, the impact of the short shelf life was a function of just rebalancing inventories. And I think, as you know, just given the nature of our business, our deployment organization, we work very closely with our blood center partners. We have a good insight into their operations, how they produce product, how they distributed product. And so as we come to appreciate that they sort of reached a normalized level of inventory, where they were able to feel good about their ability to meet platelet demand and also manage inventory. we've seen that return of normal ordering patterns, which again gives us confidence in terms of our outlook for growth in the second half of the year. But the single largest driver of my confidence in all of this is we saw no reduction in share and pathogen reduction continues to be the standard of care in terms of how platelet safety is maintained in the U.S.

Okay. And then can I just follow up and ask in the first quarter, obviously, we had the Red Cross inventory drawdown. Did that play out here in the second quarter as expected? And is that largely behind you? And then I do have one follow-up after that. I just want to make sure on the Red Cross, where we stand on that front.

Yes, sure. Absolutely. So, to answer the first part of the question, yes, we had talked about that, I think back in April that played out largely as we anticipated. The Red Cross continues to be a very strong strategic partner. They've indicated that they're moving towards harmonizing their entire platelet franchise around pathogen reduction. They're nearly there at this point in time and we're seeing continued strong partnership for them. So, I think the way you described it is accurate.

Okay. And then my last one, I appreciate you taking all my questions. but as we move past this, let's call it inventory realignment period here in the first half of '23, how would you have us think about just in general, a normalized growth trajectory for the business until we get red cell contribution, I guess in Europe in 2025; U.S. in the 2027 timeline. Just anything to help frame how the business should grow here over the next period as we're waiting for the expanded indications, expanded approvals as such. thanks.

Yes. sure, happy to. And again, maybe I'll ask Obi and Kevin to jump in to cover up to add any thoughts here when I finish. In advance of Red Cells, if you think about growth opportunities kind of stepping back and on a global basis, there continued to be significant markets, where we're either just initiating introduction of platelets or that has yet to start. We've talked about in the past our joint venture partnership in China with ZBK. There's certainly major markets in Western Europe and Latin America that, as of yet, are untapped. There's still headroom in the U.S. platelet market. So while we're standard of care and we're sort of settling into the post guidance compliance period, there are still opportunities for growth in the U.S. platelet market. And then if I think about an independent driver, that's been a significant area of focus, and we see real reasons for enthusiasm and momentum that's in the U.S. IFC franchise, where we fully staffed our hospital facing sales team. we're finding access to hospitals to be increasingly -- something that's growing increasingly. We're getting a lot of clinical feedback and we're onboarding really influential hospitals in terms of utilizing the IFC product. So, those would be the areas in advance of red cells, where I see us being able to deliver top-line growth. And again, why we feel confident that we're in a position, where we're seeing a normalization of ordering patterns and a return to growth for the overall franchise.

Thanks, Vivek. I think you covered it. The one other thing I'd add is just in the prepared comments. We talked about the relationship with OneBlood, our new production partner and what that unlocks with regard to a channel. And they have existing, obviously, hospital contracts around blood components that they can insert IFC directly into. So, we don't have to worry about hospital contracting in that context. And so we're really excited about the progress that they're making, as well as progress across a lot of academic hospitals across the U.S.

Appreciate it. Thank you. I'll get back in queue.

Okay. Thanks, Matt.

Thank you for your question. Please stand by for our last question. Our last question comes from the line of Joshua Jennings of TD Cowen. Your line is open.

Hi. Great, thanks. Good afternoon. I was hoping to just get an update on the build out of the U.S. salesforce, the hospitals facing reps. And I know it's still very early. but anything you can share just on the impacts of that build out in 2Q, both in terms of drumming up IFC demand and adoption, and also just the potential early impacts of driving hospital demand for INTERCEPT platelets and that’s trickling up, creeping up to the blood centers of their customers’ increased demand.

Yes. Thanks, Josh. As we had the U.S. commercial team out here a couple of weeks ago, I guess I'll turn it back over to Vivek since he was in the midst of all those meetings. But it was really a great discussion and interaction with the various hospital customers that they're engaged with. Vivek, do you want to give a little more context around that?

Yes, sure. I'd be happy to. I guess kind of taking a step back. One of the things, Josh, that's very encouraging was just the volume of compelling CVs and resumes that we received when we posted those roles. Selling IFC, as you know, is more of a classic position preference sale. While there are multiple stakeholders in the decision-making process, one of the key starting points as a strong clinical champion, who sees benefit in her or his practice in terms of being able to impact patients. And so we were able to get reps from a variety of different specialties to come in, who have relationships with CV, surgery, trauma, high risk OB. And so that was encouraging in and of itself. We're already seeing an impact in terms of really an order of magnitude step-up with respect to hospital visits, engagements. And as we get clinicians on board, we're seeing a lot of peer-to-peer marketing, which is pretty meaningfully impactful. as Obi indicated, we brought the fully hired sales team together out in California about a month ago now, and we did cross training on both IFC and platelets, and we certainly see opportunities when they're in hospitals to have discussions about platelets as well to further drive demand there. We're seeing a lot of our heavy platelet user hospitals being the ones, who are raising their hands on IFC. So, there are a lot of cross-pollination opportunities there and we're trying to take full advantage of that. So, it's early days still, as you pointed out, but we know that demand generation and clinical awareness falls upon us in terms of responsibility, and the sales team is a huge asset in terms of being able to deliver against that.

Great. And I just wanted to follow up on, I know you're not giving out kind of hard metrics on the IFC launch, and this is a foundation building year. but maybe, you could just help us think through the first half of the year, I think you're ahead of internal expectations for 2023. and then any update on any clinical studies or use case action that's going on? I think you called out an academic medical center in New York City that's running something, and when those use case, your clinical studies could be more impactful to the ramp of adoption of IFC in the United States. Thanks.

Thanks, Josh. So, I think as the rollout this year has unfolded, we are seeing the type of interest from academic centers that we were expecting, and that seems to be ramping. There's a real momentum behind peer-to-peer sort of interactions, and we're obviously trying to facilitate those. So, I think seeing major academic centers like UCSF and Ohio State, and others really adopt the technology and then roll it out much more broadly within their institutions is really compelling. And then the other thing I mentioned previously around OneBlood was just that channel combined with our existing sales team really opens up the market. It's not just the hospital contracts that exist, but also their internal teams. And as we expand those types of partnerships to even larger blood center institutions than one blood, that really gives us access across the entire country to major hospital institutions. Larry, do you want to provide a little bit of color around the study that we're doing in New York and sort of what the initial observations are?

Yes. we have a study, which is running at New York Weill Cornell Medical Center, and what we're seeing is that IFC can be delivered from time of order to patients on average in 16 minutes. So, we've dramatically changed the pattern of transfusion use for this product and it's being well received in that setting, and we're rapidly accumulating the data that we'll have later this year or early next year.

All great. Thanks so much.

Thanks a lot, Josh.

Thank you. This now concludes the question-and-answer portion of our call. I'd now like to pass the call back over to Obi Greenman, the CEO of Cerus, for closing remarks.

Well, thank you again, for joining us today and for your interest in Cerus. We look forward to updating you on our continued progress through the rest of the year. Thanks a lot for joining us today.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.