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Executives

Martin M. McGlynn - Chief Executive Officer, President, Director, Member of Strategic Transactions Committee, Chief Executive Officer of StemCells California Inc and President of StemCells California Inc

Rodney K. B. Young - Chief Financial Officer and Vice President of Finance & Administration

Analysts

Stephen M. Dunn - LifeTech Capital, Research Division

Jason Kolbert - Maxim Group LLC, Research Division

Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division

StemCells (STEM) Q4 2012 Earnings Call March 21, 2013 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 StemCells' Earnings Conference Call. My name is Derek, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Martin McGlynn, President and Chief Executive Officer. Please proceed.

Martin M. McGlynn

Thank you, Derek. Welcome, everybody, and thank you for joining us today. So on our call, Rodney Young, our Chief Financial Officer and I, will deliver some prepared remarks. Rodney's remarks will include a discussion on the financial results for the fourth quarter and also for the full year 2012 and then I will follow-up with a discussion of some of the exciting activities that are going on in the company and then we'd be happy to open up the lines for question-and-answer period. So over to you, Rodney.

Rodney K. B. Young

Thank you, Martin. As usual before we proceed, I want to remind everyone that during today's call, we will be making some forward-looking statements, which reflect our current views and are based upon certain assumptions that may or may not ultimately prove valid. We assume no obligation to update these forward-looking statements anytime in the future and our actual results may differ materially from anything projected during today's call due to the risks and uncertainties to which we are subject. These risks and uncertainties are described in excruciating detail in our public filings with the SEC and at the end of our Q4 earnings release, which you are encouraged to consult.

So as you have seen from Tuesday's press release, 2012 was a very successful year for StemCells. We made progress in our clinical development efforts and reported out some very encouraging data, all the while keeping tight control of our cash burn and strengthening our balance sheet. So I'm going to speak mainly to our full year 2012 results, but obviously, if you have specific questions about the fourth quarter, please ask them.

So for the year, the highlights were: Our operating expenses were down 19% year-over-year compared to 2011; revenue from our SC Proven business sales were up 29% year-over-year; our cash burn was $19.9 million, which is 10% lower than the prior year; and our pro forma cash balance at the end of the year was $24.4 million. That $24.4 million includes $2 million from warrant exercises in the sale of shares subsequent to December 31. So starting with the top line, as I said, SC Proven sales increased 29% in 2012 and we're now approaching $1 million in annual sales. This is a small business, but compared to 2009, which was the first year the business operated under our management, we have grown sales at an annualized rate of just over 30%. So in 2012, this growth was driven by higher unit volumes and only modestly by price increases. And we still see opportunities for this business and expect continued growth via the combination of increased unit sales as well as the launch of new products.

Operating expenses for 2012 declined 19%. They were $23.65 million compared to $29.1 million in 2011. Similarly, loss from operations declined 20% in 2012. They were $22.5 million compared to $28.1 million in 2011. These declines reflect the full year effect of the cost containment initiatives we undertook in 2011.

So for the full year 2012, we reported $5.9 million in net other expense, which is below the operating income line. This was entirely from an increase -- due to an increase in the fair value of our warrant liability. And just to remind everybody, under warrant liability accounting, an increase in our share price leads to an increase in the warrant liability and increases in the warrant liability are then passed through the statement of operations as income. And again, these income or expenses that come, a result from these changes in the fair value of the warrant liability are non-cash items.

So bottom line, we reported net loss per share of $0.99 in 2012 or an aggregate net loss of $28.5 million. This compares to 2011 when we reported a net loss of $1.50 per share or $21.3 million. Again, the larger net loss in 2012 was due to the change in our warrant liability, which added to the net loss because it was a net expense in 2012. On a cash flow basis, our cash used in operating activities was $19.9 million in 2012. This was 10% lower than the $22.1 million cash used in 2011. So again, with respect to cash balance, we reported $22.4 million at year-end, however as I mentioned, we received about $2 million in net proceeds subsequent to the end of the year from the exercise of warrants in the sale of shares. So on a pro forma basis, we had $24.4 million as of December 31, 2012.

Lastly, a quick word on CIRM. You'll recall that last July, the California Institute for Regenerative Medicine or CIRM, had approved our application under their disease team program, which is RFA 10-05 for up to $20 million to help fund IND-enabling activities for cervical spinal cord injury. The funding would have been in the form of a forgivable loan, however, we have elected not to borrow these funds from CIRM. You may also recall that last September, CIRM approved a separate application under the same disease team program for Alzheimer's disease, which was also for up to $20 million in the form of a loan. We remain in confidential negotiations with CIRM regarding the terms and conditions that would attach to this loan. So that's the summary of the year, the financials for the year and I'll turn the call back over to Martin.

Martin M. McGlynn

Thanks, Rodney. So 2012 was truly an eventful year for StemCells Inc. From my perspective, the most notable aspect of the year was that we were able to report and announce very encouraging preclinical, but also clinical data for a lead product candidate, HuCNS-SC, which as you know, is our proprietary human neural stem cell. So with regards to Pelizaeus-Merzbacher disease, or PMD, a rare leukodystrophy that's characterized by imperfect growth of the myelin sheath that surrounds nerve fibers in the brain. We published the detailed results of our Phase I trial in October in the prestigious peer review journal Science Translational Medicine. But let me remind you what we reported.

Firstly, it was evidence of progressive and durable denovo myelination in all 4 patients transplanted with the cells. Secondly, there were measurable gains in motor and/or cognitive function in 3 of the 4 patients in the study. And the fourth patient remained clinically stable. All 4 patients in the trial had the worst form of the disease. This is known as the colonatal form. And it is -- it's very aggressive and it advances pretty aggressively. So the children usually succumb to the disease within the first decade of life. So in that context, the gains that were observed in neurological function and reported on in Science Translational Medicine, however modest, are unexpected and provide the first demonstration of a biological effect of our cells in humans. And I would consider this to be a landmark event for StemCells Inc. Now since then, since the publication of the data, we've been diligently engaged in worldwide detailed discussions with experts in the field with regards to the design of the next study. We have made excellent progress in that regard and are planning to request a pre-protocol submission meeting with the FDA, so that we can discuss our plans and solicit their input before we submit the final protocol for a Phase II trial.

With respect to spinal cord injury, several times in 2012, we reported data from our Phase I/II spinal cord injury trial, which is underway in Zürich. In May, our principal investigator, Dr. Armin Curt, reported interim safety data from the first patient cohort, showing that the cells, the procedure and the immunosuppression regimen were all well tolerated. Interestingly, he also noted the changes in sensitivity to touch were observed in 2 of the 3 patients in the cohort. And in September, Dr. Curt presented the 6 month data for the first cohort showing that 2 of the 3 patients had multi-segmental gains in sensory function compared to pretransplant baseline. And just last month, we reported that this cohort had reached 12 months post-transplant and had completed the trial. I reported at the Bio CEO and Investor Conference in New York that the 12-month assessment showed that the sensory gains first observed at the 6 month time period had persisted. In addition to that, one of the patients I converted from a complete injury to an incomplete injury, that is to say from ASIA A classification to an ASIA B classification. So now, we've dosed our first ASIA B patient, that's a patient with an incomplete spinal cord injury. However, as expected, patient enrollment has slowed down due to the relative scarcity of ASIA B patients compared to ASIA A patients. We have taken a number of steps, which we are confident will accelerate patient enrollment in our study this year. I also just want to state that given the very encouraging data coming from this Phase I/II trial, we remain fully committed to accelerating and broadening our spinal cord injury program. With respect to age related macular degeneration or AMD, we published in January the preclinical data underlying our IND. And in June, we initiated our Phase I/II trial in dry age related macular degeneration, at the Ratner Foundation up the Southwest. We will be adding a second trial -- clinical trial site shortly and we plan to add more sites later this year. And lastly, but by no means least, in July, we presented preclinical data demonstrating that our HuCNS-SC cells, restored memory in 2 animal models relevant to Alzheimer's disease. Now what is particularly striking about this data is that the results did not require a reduction in beta amyloid or tau barden that are the hallmarks of Alzheimer's disease pathology. This suggests that our neural stem cells may represent a novel therapeutic approach to this devastating disease. As Rodney mentioned, we remain in discussions with CIRM regarding the terms and conditions for a CIRM loan that would help fund our pre-clinical and IND-enabling activities for Alzheimer's.

So in closing, I just want to say that given the fact that clinical data has now begun to emerge from our trials, confirming the exciting observations that we and our collaborators made in the various animal models that were used in the preclinical testing, StemCells, Inc. has reached what I would describe as a very exciting phase in its pioneering efforts to develop this neural stem cell technology. Moreover, if the early indications are proven in the Phase II trials, we will deliver on our vision of bringing a truly disruptive therapeutic to the clinic for a broad array of diseases and conditions affecting the CNS. So I thank you for your attention and I will now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Stephen Dunn, LifeTech Capital.

Stephen M. Dunn - LifeTech Capital, Research Division

Just a couple of questions here. On the PMD, there's been talk in the past that the results that we've seen in PMD could be applied to other somewhat similar indications, myelination defects. Are you still looking at potential additional indications internally?

Martin M. McGlynn

Yes. The short answer is, yes, we are. PMD is a diffused disorder of the brain and there are many other leukodystrophies that could well benefit from this intervention. But the first item on the agenda for us right now, Steve, is to finalize the discussions with regard to the design of a Phase II study in PMD and once we've gotten that under our belt, we'll then start looking at the other leukodystrophies. So it's still very much and we are thinking very much in our agenda, but we're prioritizing our efforts.

Stephen M. Dunn - LifeTech Capital, Research Division

Okay, 2 more quick questions. In dry AMD would we be able to see some consulting label -- some interim data perhaps at ARVO?

Martin M. McGlynn

I'm sorry, Steve, we lost you there. Could you repeat the question?

Stephen M. Dunn - LifeTech Capital, Research Division

Sure. In dry AMD, is there a potential for seeing some interim data at ARVO since it's an open label trial and you dose the patient in October?

Martin M. McGlynn

No, I think it's probably premature for that, Steve.

Stephen M. Dunn - LifeTech Capital, Research Division

Okay. Final question. Since you're not going to take out the loan for cervical spinal cord injury, are you thinking about, perhaps, you're doing that yourself? In other words, on your own funding?

Martin M. McGlynn

Yes, I mean, our game plan is to continue funding our spinal cord injury program. But we're not going to do so by taking a loan from CIRM under that RFA.

Stephen M. Dunn - LifeTech Capital, Research Division

Well I think specifically, your current trial is thoracic and I was wondering if you're going to begin a cervical as well?

Martin M. McGlynn

Well, we will certainly -- I mean, the ultimate goal is cervical spinal cord injury. That's where majority of injuries are and that's where the greatest need is, but we appreciate the paradigm is to start low in the cord and then move up into the cervical spinal cord region. And we're -- actually we're very encouraged by what we're seeing in the Phase I/II study in Switzerland in the thoracic reason because when you consider that we're seeing multi-segmental gains in the thoracic region, the implications of segmental gains, even 1 or 2 segments in the cervical region, are quite relevant because what it means is that you could potentially bring arms and hands into play that heretofore, the patient was unable to move or to function. And even just that incremental clinical benefit, could have a very meaningful effect for the patient and for caregiving in general. So, yes, it's very much in our thinking. It's ultimately where we want to end up and we're pursuing the careful strategy of first demonstrating safety, which, I think we continue to do very well. Secondly, the results we got in the ASIA A patient population, which are the worst of the worst, they were unexpected in the sense that patients at that stage of the injury, with the degree of injury that the patients we have in our trial have occurred, are typically not -- you just do not expect to see any gains in sensation at that stage of the game. So it's all very encouraging and we're committed to continue funding our efforts for spinal cord injury.

Operator

The next question is from the line of Jason Kolbert, Maxim Group.

Jason Kolbert - Maxim Group LLC, Research Division

I just want to talk a little bit about everything, but let's talk about the spinal trial and I know that we've had some discussions kind of off-line about doses that were used in the animal experiments and the doses that are used in the human experiments. So could you just take a minute and remind me how the current dose that you're using in the current human spinal trials came about and how it translates back to the animal dosages? Because I think that's a real differentiating point now that there are others attempting spinal trials.

Martin M. McGlynn

Yes, I mean, look, we firmly believe that dose matters. Obviously the purity of the population of cells that you're putting into the patient also matters. To remind everybody, our cells are highly purified, expandable human neural stem cells. The initial studies that were done in the animal models were conducted at Alien Anderson's lab at UC Irvine. And we worked off that dose that was used to demonstrate restoration of hind limb function in those animal models. So we worked up from the animal model dose and scaled up to the human equivalent. So -- and then, after we had done the math we backed off a little bit for safety. So we've ended up with a human dose that is many, many multiples larger than the animal dose which in turn was used to show restoration of motor function.

Jason Kolbert - Maxim Group LLC, Research Division

Perfect. I just want to get that out. And then help me understand going forward, if we were to look ahead a year and you finished ASIA A, ASIA B, ASIA C and you're contemplating a Phase II trial. I guess one of my questions is, and I know it's too early to speculate on this, but might we see an abbreviated Phase II trial, I'm going to say modestly powered and on good results on a Phase II, do you think that, that might be a pathway to the marketplace given the unmet medical need and once safety is proven, that it's likely -- I'm trying to understand will this be followed by a larger Phase III or on a compelling Phase II data set, is there a window for discussions with the regulatory agencies?

Martin M. McGlynn

So in the first instance, safety is job 1 for us and it's job 1, I think, for the spinal cord injury community as well. We first need to demonstrate that there is no downside from a safety perspective, pain threshold, allodynia, and any other adverse effects that one might theoretically consider. And that's the paradigm because you're trying to limit the possibility for adverse events associated with the intervention in the cord. Obviously as you move further up the cord, the risk reward ratio changes considerably. The reward is that a couple of segments improvements up in the cervical spinal cord region can possibly give you significant improvements in motor function apart from sensitivity. The other side of the equation, of course, is that if something untoward happens further up in the cord, the potential for serious consequences increase. At the end of the day, we want to be able to bring a therapeutic to the market for traumatic spinal cord injury, whether it's thoracic or cervical. And the pathway to an approval for that will remain flexible and it will be driven by the data, and will be driven by the willingness of the regulators to allow flexibility in the approach to the clinical trial and ultimately, the pathway to a BLA. But this stage, we're not locked in on a kind of a schematic programmatic, step 1, step 2, step 3 approach to a BLA. We remain wide open in our thinking. We'll follow the data and we'll keep some flexible paradigms on our mind as we engage the regulators.

Jason Kolbert - Maxim Group LLC, Research Division

Martin, I hear everything you're saying. One of the questions I'm wondering is, if safety is demonstrated in the multitudes of indications that these cells have now been used in man, is there any way to kind of compile some of the other indications that these cells have been used to increase your confidence level on safety? And I have kind of a follow-up where I want to talk just a little bit about macula degeneration, but is there a utility to looking at kind of across other trials in terms of these cell's safeties profile?

Martin M. McGlynn

Sure. I mean, again, the short answer is, yes. We have, I believe, it is 16 patients that have received the cells. 3 of them have now -- are now over 5 years since they received the cells. The safety database continues to increase with every passing month and with every patient that we add. And so the fact of the matter is that the results of our trials in the brain, the eye and the spinal cord, will all be relevant and will all be taken into consideration by the regulators. I mean, if you turn it on its head, Jason, if for example we had an adverse event in, let's say, the eye in the clinical trial for AMD, you can rest assure that the regulators would very definitely consider that, not just as it relates to that clinical trial, but would also stand back and take a long hard look at what the adverse event was and what is potential applicability might be for the other trials. So it's 2 sides of the same coin, really.

Unknown Analyst

But I think it's important to point out that you're not going into the FDA and regulators with the results of just these 12 patients. That it's really a compendium of clinical use in man. So you actually have a much stronger safety profile than pretty much any other cell therapy company working in a similar platforms. And I just want people to understand that point. Last question is on macular degeneration. This is a modest trial, 16 patients and help me with my thinking, it should enroll relatively quickly. So I'm really kind of following up on where I think Steve Dunbar was going, which is at what point are we likely to see data? And what I'm trying to establish is at what point do we start to see proof of concept that these cells are impacting visual acuity of the patients. So just remind me what the timeline is for that.

Martin M. McGlynn

Sure. So in order to do so you need to understand that the design of the AMD trial is actually broken up into 2 cohorts, which in turn, there's a subgroup in the first cohort. But the first cohort consists of 8 subjects who are essentially, they're legally blind. And so that's kind of, again, is the paradigm in terms of demonstration of safety into the particular organ or the system that you want to transplant the cells. So looking for signals, I mean, in the ASIA A population, for example, in spinal cord injury, quite frankly, we did not anticipate that we were going to be able to observe the kinds of clinical observations that came out of the first cohort. Similarly, we don't have any great expectations with regards to efficacy signals coming out of that first group given that they are very, very advanced in AMD. But you never know, right? Thereafter, we will switch into the second group, another 8 patients, who have -- who are less severely impacted in the disease. And those are the patients that quite frankly, you would expect to be able to see a divergence versus the natural history of the disease. In terms of data, our goal right now is to dose that patient cohort, that first group of 8, and we wouldn't anticipate that we will be presenting any kind of meaningful data until the first half of next year.

Operator

Your next question is coming from the line of Kaey Nakae of Ascendant Capital.

Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division

Marty, as it relates to the spinal cord study, can you give us a little more detail about some of the changes you're trying to make to increase the possibility of enrollment of the ASIA Bs?

Martin M. McGlynn

It's a great question. But this space has become competitive now. So I don't intend to provide any much more information other than that which I have stated. We're pretty confident that the initiatives we've taken will accelerate our patient recruitment. And, I'm sorry, I can't be any more disclosive given the fact that this is now a competitive space.

Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division

Okay. Can you tell us how many of the first 8 patients in the first cohort of the AMD study you've enrolled?

Martin M. McGlynn

I believe we've enrolled 2 and there is a third patient lined up as we speak. And we would hope that, as I said, we would hope that we would be in a position to present the first tranche of data in the first half of next year.

Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division

Okay, great. Moving on to PMD, what would be your expectation for when you would be able to meet with the FDA to discuss the possible design of the Phase II study?

Martin M. McGlynn

It will be this year, for sure. We have a number of things on our plate that involve the FDA. So it's really -- we want to finish up our discussions with the clinical experts. As I said, we're pretty well there. We have a pretty good sense now of what we would like to do based on what the experts -- given what we perceive from the experts both those who are involved in the treatment and care of children with that condition, as well as those who bring scientific expertise to the table. So we're pretty well done almost in terms of our own homework and knowing what it is that we want to do and what it is we want to discuss with the agency. There is a process you have to go through, there's a -- you'll have to get in line and take a number and then you get your meeting date. But it's a priority for the company and we're very excited by the data and we're very much looking forward to getting the agency's response to our -- to what we believe would be a smart and well designed trial.

Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division

Okay. Just 2 more questions. I guess the first one, as it relates to CIRM. In deciding to decline the funding for spinal cord yet continuing to pursue the funding for Alzheimer's, is there a difference in what you're getting from them in terms of potential terms and conditions that allow you to proceed on one and not the other, or is it the fact that you're already in human with -- in spine, and still very preclinical with Alzheimer's?

Martin M. McGlynn

I think you're very definitely -- you're getting at some important criteria when one considers how to fund programs whether you use debt or equity, et cetera. So I wouldn't disagree with anything that you've outlined or surmised. But I just would pray your indulgence until we're finished, the negotiations with CIRM, which are coming to a close and we expect those to resolve pretty quickly with regards to the Alzheimer's program. And then quite frankly, we can be way more forthcoming and way more disclosive with regards not only to our decisions, but to our thinking.

Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division

Okay, great. And then just a final question for Rodney. How should we think about operating expense for 2013?

Rodney K. B. Young

Yes, well, that's a good question, Kaey. Burn rate is always a double-edged sword, right? Given the progress we're making and the data that's starting to come out of our trials, we're pretty encouraged to keep advancing those programs. So we do have an ambitious clinical translation agenda in front of us. So we do expect our burn rate to reflect that. But given the inherent uncertainties in that agenda, we can't really give you specific guidance right now.

Martin M. McGlynn

As the year progresses, and we start to get better sense of what our clinical trial enrollment rates are being and therefore the support expenses involved, we'll be in a better position to provide a little bit more guidance on that, Kaey.

Operator

And at this time I'm showing no further questions. Thank you. I would like to turn the call back over to Mr. Martin McGlynn for any closing remarks.

Martin M. McGlynn

So again, I would like to thank everybody for taking the time to dial into the call. As I said, I believe in 2012, we really did establish a landmark for StemCells, Inc. We had a very, very exciting time. We're now starting to harvest clinical data. They're small uncontrolled studies, but they are in the patient population that we intend to treat. And the data that's coming out is very, very exciting. So I thank you all, for dialing in and we look forward to keeping you appraised of our progress throughout the year.

Operator

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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