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Cerus Corporation (NASDAQ:CERS) An Opportunity To Buy The Dip

Cerus Corporation (NASDAQ:CERS) An Opportunity To Buy The Dip
Written by
Jarrod Wesson
Published on
May 26, 2017
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Cerus Corporation (NASDAQ:CERS), the biomedical products company, recently became so popular on the iHub forum and the Yahoo Finance Forum that we believe that our regular readers would be very much interested in a piece about this name. Every chat that we visited repeated the same: the recent collapse in the share price is a great opportunity. Have a look. In less than a month, the company’s shares went from $4.5 to $2.26 now. What happened in such a short time?SourceBusinessThe company was founded in 1991. It is headquartered in Concord, California. It develops the "INTERCEPT Blood System", which is designed to "inactivate blood-borne pathogens in donated blood components intended for transfusion". According to the annual report, some of these viruses are HIV, West Nile, SARS, hepatitis B and C. Furthermore, it also protects against bacteria and parasites, as well as potentially harmful white blood cells. The following are the products being sold or under R&D:

  • INTERCEPT Blood System—Platelets and Plasma: both being commercialized in the US and internationally.
  • INTERCEPT Blood System—Red Blood Cells: in Europe, the CE mark submission is planned, whereas in vitro studies are planned in the US (not yet commercialized).

CERS has collaboration agreements with relevant players in the healthcare business, such as Baxter International, Inc. and BioOne Corporation. Additionally, it also works for the US Armed Forces.Recent DevelopmentsHow can we explain the collapse in May?SourceOn May 3, the company released its financial results for the first quarter ended March 31, 2017. But, the most relevant of the press release put out was the adjustment of its revenue guidance from $43 million to $48 million:

“Coming out of our first quarter, we remain optimistic about our growth prospects over the next several years from major markets including the U.S., France and South Africa, but were not able to sign new contracts for the latter two geographies by now as we had previously expected. Therefore, though no less confident in our ability to capture this new business in the near to medium term, we believe it is prudent to adjust our 2017 product revenue guidance to a new range of $43 to 48 million dollars,” Source

The product revenue obtained in 2016 was approximately $37 million, and the year before it was only $34 million. The company is telling now that the annual revenue will jump 21% (average), while in previous years, it did not cross 10% growth. In our opinion, the market is not factoring in this future growth.A negative in the report was that earnings per share were worse than expected. The market was expecting $0.17, whereas the company released $0.18. Furthermore, the weaker Euro compared to the U.S. Dollar did not help at all:

"The Company experienced strong year-over-year growth for U.S. disposable kits, which was overshadowed by lighter demand for plasma products in EMEA and a weaker Euro compared to the U.S. Dollar." Source

Additionally, on May 23, 2017, the company released the following information:

"It had received notification last week of a pending U.S. supply shortage of a platelet additive solution (“PAS”) manufactured and sold by Fresenius Kabi Deutschland GmbH (“Fresenius Kabi”). The pending shortage is due to an unanticipated delay in U.S. Food and Drug Administration (“FDA”) approval of a plastic component used in the manufacture of the PAS container following discontinuation of the original component by Fresenius Kabi’s supplier. The shortage is expected to temporarily impact certain U.S. blood centers that utilize PAS to produce INTERCEPT platelets. Fresenius Kabi has stated that it is working with its suppliers and the FDA to resolve this delay and minimize any long-term disruption in supply. However, Cerus believes that the pending shortage could adversely affect INTERCEPT platelet production by impacted blood centers through year end." Source

What does it mean? The press release says that the company may be damaged from the shortage of a solution used by some U.S. blood centers to produce INTERCEPT platelets; the company's product. Hence, the revenues could be impacted going forward.Is this an opportunity?Yes, it seems to be an opportunity. Usually, when the market receives large amount of bad news, it pushes down the share price too much. This is exactly what the hedge fund ELK CREEK PARTNERS, LLC, believes. This fund acquired 5,369,931 shares in May. Additionally, other funds hold large amount of shares of the company. Have a look:Owner NameDateShared HeldChange (Shares)Change (%)Value (in 1,000s)BAKER BROS. ADVISORS LP03/31/201713,053,27500.0029,370BLACKROCK INC.03/31/20178,028,195164,5082.0918,063PRIMECAP MANAGEMENT CO/CA/03/31/20177,800,00000.0017,550VANGUARD GROUP INC03/31/20174,708,427343,5977.8710,594ELK CREEK PARTNERS, LLC03/31/20174,337,1791,157,74536.419,759PEREGRINE CAPITAL MANAGEMENT LLC03/31/20173,587,940243,8547.298,073

Financial situation and Conclusion

The company has a very solid balance sheet. The asset-liability ratio is close to 2x. The company holds approximately $10 million in cash, and $39 million in short term investments. The total amount of liabilities is approximately $43 million and the long term debt is only approximately $10.5 million. Hence, this company is on solid financial ground.In our opinion, CERS suffered two problems recently that will harm the final revenue of 2017. It could not sign as many distribution contracts internationally as expected and had to diminish the revenue guidance for 2017. Additionally, US supply shortage of one of the solutions used to produce the company's product and will affect 2017 revenues as well. The share price was seriously affected. We believe that it is too much, and it may rebound soon. So, be alert, this stock may surprise us soon. We will be updating our subscribers as soon as we know more. For the latest updates on CERS, sign up below!Disclosure: We have no position in CERS and have not been compensated for this article.

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