Cytomedix's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Nuo Therapeutics, (NUOTQ)

Cytomedix, Inc. (CMXI.OB) Q2 2013 Earnings Call August 8, 2013 8:00 AM ET

Executives

Martin Rosendale – Chief Executive Officer

Steve Shallcross – Executive Vice President & Chief Financial Officer

Michael Rice – LifeSci Advisors, LLC (NYSE:IR)

Analysts

Jason Napodano – Zacks Investment Research

Operator

Good day, ladies and gentlemen and welcome to the Q2 2013 Cytomedix Earnings Conference Call. My name is Caroline and I will be your Operator for today. (Operator instructions.) As a reminder, the call is being recorded for replay purposes. And now I’d like to hand the call over to Michael Rice from LifefSci Advisors. Please go ahead.

Michael Rice

Hi, good morning and thank you. This is Michael Wood with LifeSci Advisors. I’d like to thank you for participating in today’s Cytomedix Q2 2013 Earnings Conference Call. Joining me from Cytomedix are Martin Rosendale, Chief Executive Officer, and Steve Shallcross, Chief Financial Officer.

Here’s an outline of today’s call. First, Martin will provide some background on the recently concluded partnership with Arthrex and then an update on the company’s developments. Then he will hand the call over to Steve who will provide you with a summary of the Q2 2013 financial results. Finally, Martin will conclude with an outlook for the remainder of 2013 before opening up the call to questions.

After the market closed yesterday Cytomedix announced financial results for Q2 2013. If you’ve not yet received this news release or would like to be added to the company’s distribution list, please call LifeSci Advisors in New York at 646-597-6992 and speak with Paul Arndt.

Before we begin today’s call I would like to caution that comments made during this conference call will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of Cytomedix. Actual results could differ materially from those projected. I encourage you to review the company’s filings with the Securities and Exchange Commission including that limitation in the company’s Forms 10(k) and 10(q) which identify specific risk factors that could cause actual results or events to differ materially from those described in the forward-looking statements.

Furthermore the content of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast, Thursday, August 8, 2013. Cytomedix undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call. I would now like to turn the call over to CEO Martin Rosendale.

Martin Rosendale

Thank you, Michael. Good morning everyone and thank you for joining us. I’m Martin Rosendale, Chief Executive Officer of Cytomedix, and joining me on the call today is Steve Shallcross, our Chief Financial Officer who will update you on our financial results for the quarter. But before that I want to spend a few minutes and take you through the partnership with Arthrex that we just announced, the impact it will have on the company’s operations; and provide an update on the company overall.

Over the past several months our management team has undergone a thorough evaluation of Cytomedix’s assets and an in-depth review of our existing business capabilities. Based on this evaluation we are repositioning ourselves to focus all commercial resources and activities in the $3 billion US wound care market. This realignment will allow us to leverage our existing sales and marketing capabilities and build on the significant gains we have made in reimbursement while permitting expansion into new and important markets.

Based on the market access gained by the national coverage decision by CMS, we expect that AutoloGel offers the most substantial opportunity for long-term, meaningful sales growth for the company. We continue to be pleased with the sales we have been able to achieve with the Angel system, which we see as a best-in-class device, but at this point we think a partnership with an established company will result in accelerated growth – and consequently we are announcing a deal with Arthrex who already has a strong presence in orthopedics.

Let me go into some more detail relating to the Angel partnership. We are very excited to have Arthrex as a partner. This is a privately held company with an excellent track record and they are an acknowledged leader in orthopedics. We are retaining ownership of Angel but granting Arthrex exclusive worldwide rights to market the product. They have a large commercial infrastructure supporting sales throughout the world and will immediately take responsibility for all sales and marketing activities for Angel. In exchange, Cytomedix will receive an upfront payment of $5 million plus royalties on sales. The royalties are in the low teen range.

Over the past few years we established market acceptance of the Angel system and a solid growth pattern for sales of the product. The decision to partner Angel was driven by our conviction and observation that there is an opportunity for faster sales growth in the hands of a larger established company. We are confident that the extensive experience Arthrex has in this area makes them the ideal partner for Angel.

Before we signed this deal we carefully evaluated various options for Angel. Our analysis indicates that the royalty stream provided by the Arthrex agreement will ultimately result in net cash flow that is the same or higher than what we could have expected if we had continued to market the product ourselves. This deal provides further validation for Cytomedix’s products and we see it as a significant milestone. But just as important, the agreement will permit our sales and marketing functions to concentrate on what is now our primary commercial objective – AutoloGel.

Before we get into the details of the plans for the AutoloGel launch I think it would be helpful to give an update on where we stand with Medicare reimbursement. The Center for Medicare and Medicaid Services, CMS, has agreed to provide coverage for AutoloGel initially through what is known as the CED program – coverage with evidence development. This program allows for reimbursement for items and services while at the same time generating additional clinical data to demonstrate the impact on health outcomes.

As a reminder, in 2008 CMS reaffirmed the national coverage decision, or NPD, dating back to 1992 which prevented payment for autologous blood products used in wound care and effectively closed access to the market for AutoloGel. After collecting and publishing a significant and robust body of evidence, Cytomedix successfully convinced CMS to reverse that longstanding non-coverage decision in August of last year, providing access for AutoloGel never before realized. Following this decision, Cytomedix and CMS agreed to the registry-based protocols that will be used to collect patient data as evidence of effectiveness.

We announced early in July that CMS issued proposed payment regulations under the physician fee schedule and the hospital outpatient prospective payment system. I want to emphasize that this is an initial proposal made by CMS. The final regulations will not be announced until November and will take effect January 1, 2014. The release of the final regulations will be following a review and revision period that allows interested parties to make public comments. These proposed regulations will determine the reimbursed payment amount for AutoloGel in these two distinct segments of the market – the physician’s office and hospital outpatient settings.

In the first of these proposed payment rules, the physician’s office, CMS has proposed that Medicare administrative contractors determine the payment amount for AutoloGel based on the claims and invoices submitted by healthcare providers. This effectively allows the individual contractors to determine the level of reimbursement. For Cytomedix this means that we can immediately start charging a price that is economically viable. As a result, Medicare beneficiaries suffering with chronic wounds will have access to AutoloGel treatments in their doctors’ offices.

In an analysis of a 5% sample of the Medicare claims database we were able to show that 46% of all wound debridement procedures were performed in the physician’s office. So at nearly half of the available market and newly acquired access to physicians’ offices through CED represents a significant opportunity for AutoloGel.

The situation in the hospital outpatient setting is a little more complicated. For claims submitted from July 1st through December 31st this year, CMS has placed a reimbursement code for AutoloGel in an ambulatory payment classification or APC that initially provides only limited reimbursement.

While the immediate effect is that some patients who would benefit from treatment with AutoloGel may not yet have access, we remain optimistic that CMS does want the national coverage termination to be implemented successfully and will therefore ultimately arrive at a reasonable APC assignment following the public comment review and process. CMS is expected to make a final ruling in November and changes made in that final rule will become effective on January 1, 2014.

In the same Medicare claims database I mentioned a minute ago, it showed that 47% of wound debridement procedures are performed in the outpatient setting. We anticipate improved access to this market after the final HOPs payment decision, allowing us to expand quickly into the outpatient care setting.

The commercial launch of AutoloGel will proceed in a stepwise fashion beginning immediately with wound care physicians in the community and with the Veterans Health Administration hospitals. The VHA is the largest integrated healthcare system in the country, serving more than 8 million veterans a year through its 1700 facilities. We are also targeting other government health organizations to fully leverage our current position on the federal supply schedule.

By focusing on these important and underserved markets we expect to be able to meaningfully expand the number of patients treated with AutoloGel. In the meantime we will continue to lay the groundwork for launch in the hospital outpatient market and plan to undertake a major launch in wound clinics beginning in January, 2014. We expect to double the size of our experienced device and biologic sales force during 2014 to accommodate the growing number of AutoloGel treatment sites.

To summarize, the current national coverage decision provides market access for AutoloGel never available previously. We have a robust body of published clinical evidence to drive acceptance, and the evidence collection from the CED process will be valuable in expanding sales and driving future claims. Access to the federal supply schedule will facilitate acceptance in government markets such as the Veterans Administration, and initiatives to reduce healthcare expenses across all points of service will further increase the value of AutoloGel.

We are expanding our wound care sales organization today and plan to double it again in 2014. We continue to seek specialized partners to support our sales and promotion plans and anticipate that demonstration of market acceptance will drive those partnership discussions.

Now for an update on the Bright Cell technology. In May, the Data Safety Monitoring Board for the RECOVER-Stroke Trial reviewed the first 30 patients in the study and concluded that the trial could proceed, further establishing a strong safety record for the technology. The PACE Study, which is being funded by the NIH, has begun and the RECOVER-Stroke Trial continues to enroll.

While we’ve been able to attract additional sites to the RECOVER-Stroke Trial the pace of enrollment continues to be slower than anticipated. A total of 36 patients have been enrolled to date. We have begun pursuing strategic opportunities that could help us better align our R&D expense with the study enrollment and help us manage these programs with an eye to improve shareholder value.

I am confident that the plans I have just described will get us to a point where we can achieve sustainable long-term growth for Cytomedix. I believe we have set out on the right path for the company to be commercially successful, and I’m also confident that our people have the talent, drive and focus to deliver for our patients, our customers in the medical community, as well as our shareholders. Now I’d like to turn the call over to Steve for an overview of the quarter.

Steve Shallcross

Thanks, Martin. Total revenues for the quarter ended June 30, 2013, were $2.4 million, a $1.3 million decrease compared to the June quarter 2012. The decrease is primarily due to nonrecurring license fee revenue of $1.8 million, recognized in Q2 2012 with respect to an option agreement we had signed with a top 20 global pharmaceutical company. Product sales however increased 30% to $2.4 million compared to the same period last year.

Overall gross margin in Q2 decreased to 44% from 73% in the same June quarter 2012. The license fee recorded in Q2 2012 had no associated cost of revenue and was a primary reason for the difference in overall gross margin year-over-year. Gross margin on product sales decreased to 43% in Q2 2013 from 46% in the June quarter of 2012. The decrease is attributable to Angel machine refurbishment costs, the medical device excise tax which took effect in 2013, and a non-cash patent amortization charge related to the AutoloGel product.

Q2 cash margins on product sales decreased to 50% from 54%. Cash margin is a non-GAAP financial measure we use as we believe it is a significant performance metric to indicate cash profitability on product sales. It is directly comparable to US GAAP measures of gross margin. We define cash margin as gross margin exclusive of patient amortization and depreciation expense which was $163,000 and $137,000 in Q2 2013 and 2012 respectively.

Total operating expenses in Q2 were $5.7 million, an increase of $0.7 million or 13% compared to the June 2012 quarter. Salary and wages expenses increased during Q2 2013 to $2 million compared with $1.8 million in the June 2012 quarter. The increase was primarily due to additional operational headcount. Total consulting and professional fees in the quarter were $1 million compared to $0.7 million in the June 2012 quarter. The increase was primarily due to CMS reimbursement-related consulting fees and higher legal fees.

Research and development expenses in Q2 were $1.2 million compared with $1.1 million in the June 2012 quarter. The difference is primarily due to one-time manufacturing charges related to the sourcing and testing of Angel centrifuge replacement components. General and administrative expenses were $1.5 million, essentially even with the June 2012 quarter. Cytomedix recorded a net loss of $5.0 million or $0.05 per share for Q2 compared to a net loss of $7.5 million or $0.09 per share last year.

Turning briefly to the results for the six-month period ended June 30, 2013, total revenues in the first half of 2013 were $4.7 million compared with $6.7 million in the first half of 2012. The decrease is primarily due to the license fee of $3.2 million recognized in 2012. Product sales for the first half of 2013 were $4.6 million, an increase of 32% year-over-year.

Total operating expenses in the first six months of 2013 were $11.8 million, up 18% from the $9.9 million reported in the same period of 2012. We recorded a net loss of $10.4 million or $0.10 per share for the six-month period ended June 30, 2013, compared to a net loss of $12.2 million or $0.17 per share for the same period last year.

Cash used in operations for the six months ended June 30, 2013, was $7.9 million. There were approximately 104.8 million shares of common stock issued and outstanding as of June 30, 2013. Cash and cash equivalents were approximately $3.4 million at June 30, 2013, up from $2.6 million at December 31, 2012. Upon receipt of the Arthrex upfront payment of $5.0 million, the company will have cash and cash equivalents of approximately $7.0 million at or about August 8, 2013.

I would now like to turn the call back to Martin for some additional comments.

Martin Rosendale

Thank you, Steve. At Cytomedix we are highly motivated to drive value for our patients, customers, and shareholders. We are excited about the new partnership with Arthrex. Throughout our discussions with the Arthrex team they have consistently demonstrated the deeply ingrained values that have resulted in their exemplary record of success, and that success has allowed them to grow to become a market leader.

Cytomedix has shown that the Angel system is a best-in-class device and that double digit year-over-year sales growth can be achieved with only a modest sales effort. We believe that by applying the Arthrex talent for commercial execution and extensive resources, the market penetration for Angel will expand significantly.

By applying the same values and drive to AutoloGel that resulted in the success of Angel and taking advantage of the market access provided by the CMS national coverage decision we believe AutoloGel will capture a significant share of the wound care market and drive value for Cytomedix.

So before I open the call up to questions I would like to address a couple of questions that I get or have gotten on a fairly regular basis when investors have called me here in the office. First of all, before I do that I just wanted to make sure that I stress something with respect to the partnership announcement that we’ve just announced.

Last night after our announcement I received an email from a friend, someone who helped us with the analysis on this deal who reminded me that Arthrex is a private company and the market may not understand very well at this point exactly who they are and what they’re capable of. And I just can’t emphasize enough that Arthrex has a tremendous record of success. They’ve been able to grow their company significantly since the early ‘90s to become a market leader and they were able to demonstrate significant sales growth and growth overall during a time when we were all experiencing a global recession. So we’re very excited about this partnership and we’re expecting it to work out very well for Cytomedix and drive value for our shareholders.

One question that I get regularly is “What’s the status of discussions around an AutoloGel partnership?” Today I can say that the partners or potential partners we’ve been talking to still have not walked away from the table, but obviously the discussions have been moving at a slow pace over the last couple of months. This is mostly due to questions and clarity around CMS and the CED decision.

What we’re finding is technically based on the fact that our government tends to move slowly and has at times in the past made decisions that appeared unreasonable there is lack of comfort or lack of confidence in the AutoloGel product and the reimbursement going forward. So the follow-up question that I get to that is why am I confident? Why do I believe that CMS is going to be successful? Why do I believe that our coverage is going to be successful? So I’ll answer both of these questions together.

First of all, with respect to the partnerships what it’s going to take to move those along is evidence that we can succeed and that we will achieve what we’re claiming we’ll achieve with AutoloGel in this marketplace given our reimbursement. My confidence in that comes from a couple of areas. First of all I acknowledge that the government often makes decisions or takes actions that appear unreasonable such as providing a national coverage decision and then authorizing a payment that is limited or not sufficient to support the coverage decision.

On the other hand, the people within the government, particularly within CMS that we’ve been dealing with are very reasonable and rational. The coverage group that gave us the national coverage decision has been helping us by walking us through the contacts we need to make in order to facilitate the changes that’s required to get an approved payment in the hospital outpatient setting. The clinical data that supports the technology that’s keeping our potential partners at the table by the way is very robust, and CMS wants this national coverage decision to be successful.

So while the government doesn’t move quickly and we do have to go through the public process that’s been initiated we remain in contact with them. The contacts that we have within CMS are reasonable and rational. They’re helping us make sure that we get to everybody we need to get to to get the proper decision and that gives me the confidence that the process is going to go well for us.

So with that, Operator, I’d like to open the call to questions.

Question-and-Answer Session

Operator

Okay, thank you. (Operator instructions.) The first question comes from the line of Jason Napodano from Zacks. Please go ahead.

Jason Napodano – Zacks Investment Research

Good morning, guys. So first question on the Arthrex deal, Marty, you mentioned that you expect cash flows to be equal if not greater based on what Arthrex can do. Can you give me a sense of the costs that you’ll be able to receive by passing Angel off to Arthrex? I’ve got to believe that your operating margin on Angel was higher than the royalty rate which you noted as the low teens. So can you give us a sense of the cost there? And then kind of the second question that builds off that, how many sales reps did you have promoting Angel as of let’s say yesterday and where are those people going to be moved to? Are all those people going to be moved to AutoloGel? Let’s just start there.

Martin Rosendale

Sure. So there’s a couple of questions in there, Jason, so I’ll try to remember them and answer each of them. First of all let’s start with the salespeople. We had approximately ten salespeople in the field that were driving the success and the progress with Angel going forward. A handful of them are being asked to stay with us and join the AutoloGel sales team as we continue to drive in the wound care marketplace, and the others – Arthrex has acknowledged that our small sales team has done quite well given the market, the competition and the growth that we’ve seen with the Angel system. And so there’s interest on their part to talk with them and potentially some of them will have opportunities within the Arthrex team to continue to represent the Angel system.

So there’s cost savings for us related to the commercial infrastructure that was in place supporting the Angel system going forward. And while we’re not publicly stating what the royalty rates are at this point really suffice it to say that the overhead savings, the taking over the costs of manufacturing, other aspects of this deal – our modeling indicates that we will in fact at the bottom line see the same cash flows if you will as we would have if it were in our own hands.

Jason Napodano – Zacks Investment Research

Can you give us a sense, and I know they’re a private company so they may be a little protective, but can you give us a sense of how many salespeople they have just to try to get a sense of the difference in promotion between what you guys are doing and what they kind of plan to throw at it?

Martin Rosendale

Well that’s an area specifically that they’ve asked us to shy away from – numbers of salespeople – but I’ll give you some magnitude just to give you a sense. So I told you we had about ten. The sales organization between direct and affiliated salespeople is going to be a hundredfold or better.

Jason Napodano – Zacks Investment Research

Okay, that’s helpful. And then just a little housekeeping question in terms of how you guys will recognize that $5 million – is that going to be all in Q3 here or will you recognize that over the five-year term of the deal?

Steve Shallcross

Jason, this is Steve. Part of that $5 million will be allocated to assets that are going to be transferred to Arthrex, and then what remains will be amortized over the initial period of the license, the five years. And then what we’ll do is next quarter that’ll be clearly disclosed in our next filing.

Jason Napodano – Zacks Investment Research

Okay. Let’s move to AutoloGel. So Marty, I want to discuss the press release that you guys had in July on the PFS and the HOPs – I’ll use the acronyms because I can’t remember what everything stands for. But as far as the potential reimbursement codes for specific types of chronic wounds, I’m hearing that there may be kind of an all-encompassing code for DFUs or VLUs that takes place next year that could dramatically lower the reimbursement and significantly impact some of these products.

So I guess my first question is can you give us any color on the potential for a broad scale kind of reimbursement coding for things like diabetic foot ulcers or venous leg ulcers in 2014 and then give us a sense of how that might impact a product like AutoloGel which would probably fall within that range; and then what you guys can kind of do to maybe influence that decision or what other companies are doing to influence that decision? Because I’m sure there’s products out there that may fall outside of that level if kind of a broad-scale reimbursement comes through.

Martin Rosendale

Right. So a couple of things: first of all, unfortunately the healthcare payment and reimbursement system in the US is extraordinarily complex and so I’ll do my best to explain these and we’ll encourage you to ask follow-on questions because I think it’s important for our shareholders to understand what’s happening here.

So HOPs and PFS that you referred to, HOPs is the hospital outpatient payment group and PFS is the physicians’ schedule, the physicians’ fee schedule basically. And what happens is that every year the payment groups within CMS issue proposed rules, and those proposed rules come out in July and those proposed rules contain every change that CMS would like to make to payments on every product, every service that they reimburse for in the following year.

And so those proposed rules that came out were each approximately about 750 pages long, and the section that pertains to Cytomedix was one line in those documents to basically identify either how the payment would be managed or what the payment classification would be.

So with respect to that in the physicians’ fee schedule they did exactly what we expected them to do, which was to make the payment carrier determined which puts us in a good position going forward. We expect the carriers to pay against our invoices. And in the outpatient setting as I’ve said they gave us a payment classification that is limited and makes it very challenging if not impossible to go into that market until it’s fixed. And so there’s a process that we go through and we get that fixed.

Now interestingly enough when we were going through this process, Jason, we ran into some significant resistance from CMS to give AutoloGel a separate and distinct product code, or a Q code like you see with some of the skin substitutes. And we didn’t understand because they didn’t share it with us why that was happening until we saw the proposed rules come out, and when the proposed rules came out CMS is proposing another rule, regulation that will potentially have a profound effect on other wound care technologies in the market.

CMS wants to do what they call “packaging,” and packaging means just as you described that the product and the service provided with the product are consolidated and packaged under a single payment classification. So in other words, with a product like AutoloGel under our G code, when a claim is made against G0460 which is our code and the physician will submit with that claim the time that was spent with the patient, the service that was provided and the product invoice then it will get paid as a package. That’s what CMS is referring to with “packaging.”

What they’ve proposed is that they intend to do the same thing with the skin substitutes such as Dermagraft, Apligraf and the other skin substitutes that are in the marketplace today and in essence package them under a single payment classification as well. Now the reason that CMS does this or wants to do this is because they attempt to package products that they view as similar if not identical products into a single payment classification and then it essentially drives cost competition, right? So if you believe that each of the products in that payment classification are the same then you would use the lowest priced or the lowest cost product, right?

Now, we’re not opposed to packaging and we believe for AutoloGel it’ll work well and we’re comfortable with the G code that we have, but it only works if the quality measures and the evidence that CMS look at in order to make decisions about which products are packaged in which payment classifications is good, solid, robust data, right? So we are preparing our comments for CMS today and those comments will be public, and we will comment both on AutoloGel and the payment classification and lay out the argument to why CMS should change that payment classification so that we can get into the payment level that we need.

But you will also see when it comes out that we’re going to comment on this overall concept of packaging, and our comment is going to reflect what I just said – that it will work and it will work fine as long as the quality data that CMS is using to assess these products is robust and they can draw real conclusions about these products relative one to the other.

And so again, how does AutoloGel fall out in that situation? We have excellent data, Jason. Again, that’s what’s keeping potential partners at the table while they’re waiting to see what happens with CED and to see if we can execute against the CED decision. It’s the data that convinced CMS to reverse a 20-year non-coverage decision in the first place. So we’re confident in that scenario, in that situation that we will be a winner. And you couple that with the fact that using AutoloGel is less costly than the other products that I’ve been talking about – this places us in a very good position going forward.

Jason Napodano – Zacks Investment Research

Yeah, so this is pretty interesting, Marty. I mean it could really have a significant impact on how wounds are treated, because it seems like under packaging there could be some products, whether they’re skin substitute products or what that will be reimbursed far below what they’re charging right now. Am I kind of understanding that correctly?

Martin Rosendale

Yeah, it’s possible but I want to caution you about drawing those conclusions before the November final rule because I can tell you, first of all I explained what our comments are going to look like but obviously other companies in the wound care space and key opinion leaders as well are all going to weigh in on this. I believe that packaging is inevitable. It’s a smart and rational way to go to control costs but again, all the pieces have to be in place and there is going to be I believe a significant marketplace debate around this.

Jason Napodano – Zacks Investment Research

Gotcha, yeah, so there’s going to be lobbying on both sides. I can understand that. Just kind of a final question on your ability to kind of go out now and promote into the physicians’ offices. I assume you’re talking about podiatrists or wound care specialists and you mentioned that you’d like to expand the sales force, you’d like to maybe double it again in 2014. So just can you kind of give us a sense of… I know in terms of wounds how many wounds are out there, but can you give us a sense of how many podiatrists or how many wound care specialists, maybe talk in terms of decile that you think that you can target with your existing sales force? What are you at right now? Where would you kind of like to be to really get effective promotion of AutoloGel?

Martin Rosendale

Sure. So as you can imagine we’re just making this transition, right? Our commercial focus has been on Angel while we’ve been working through the CED decision with CMS and so we’re just now facilitating this transition. And so our sales organization for AutoloGel remains relatively small at four to five people. We expect to go into 2014 with about double that and then as I pointed out double it again throughout 2014.

In my experience in specialty sales, a sales organization in the range of 25 to 30 people is a good, effective sales organization so that’s ultimately where we’d like to get to. Again, that would also be impacted by potential partnerships that we could develop along the way.

With respect to the physicians’ office market itself, obviously that’s a large market right because there are a lot of physicians out there. Some of them may treat one or two wounds; some of them likely treat a lot of wounds. You mentioned podiatrists. Podiatrists, because of diabetic foot ulcers have a tendency to treat more wounds. What we are doing right now in establishing and preparing to move forward is we’re looking to do primary research that will identify those physicians’ offices that are treating large numbers of wounds.

Now that said, I will tell you that we’ve already signed up one physician’s office network, a small office network that will be treating Medicare patients as soon as we get them trained within the next week or two. But essentially by selecting IMS data – I don’t know if you’re familiar with the IMS data system, but by selecting IMS data and looking for surrogate measures such as debridement we can determine which offices are high-volume treaters and then obviously those will become our targets. And by doing that we can improve the efficiency and effectiveness of our salespeople quite dramatically.

Jason Napodano – Zacks Investment Research

Thanks a lot, guys, I’ll jump back in queue.

Martin Rosendale

Alright, thanks Jason.

Operator

(Operator instructions.) We have Jason back after rejoining the queue.

Jason Napodano – Zacks Investment Research

Hey guys, thanks for entertaining a follow-up. I guess it’s a busy morning in earnings season and lots of analysts must be on other calls. But give us a sense of the RECOVER program. I did want to talk a little bit about Aldagen. It seems like the changes that were instituted earlier in the year, kind of the protocol change to age and the ability to kind of target different areas of stroke or different locations of stroke in the brain I should say – you know, that doesn’t look like it has had the meaningful impact that maybe we thought it would have. You’re only at 36 patients.

So you mentioned that there are some things you can try to do to try and accelerate the program. I guess so the first question is can you kind of talk a little bit about where you are now with 36 patients, what you can really do to accelerate that and then the second question, do you have to get to 100 patients for this trial to complete? I mean can you wrap it up at 60 or 75 patients with the powering that you’ve built in just to try to get some data to get some proof of concept so that you can maybe bring it to partners or whatever the kind of next level is? Because it seems like trying to get to 100 patients, unless you really have a meaningful acceleration, could be kind of a long process.

Martin Rosendale

Yeah, so first of all, Jason, we are exploring all the possibilities including the ones that you just mentioned. And I don’t have conclusions for you today but please understand that we’re very aware of the cash expense of this study and so we are exploring all of those possibilities. Your observation is accurate – the changes that we talked about with respect to changing the protocol, allowing us to treat a broader variety of strokes, allowing us to expand the inclusion and exclusion criteria, even with those changes that we expected to have an impact on the enrollment rates, our enrollment rates have been pretty consistent and unchanging since about November of last year.

So we haven’t had a lot of impact on our ability to enroll the study any faster. So that’s what’s driving our current analysis of the situation and as I said we’re looking at all those possibilities, including the ones that you mentioned specifically.

Jason Napodano – Zacks Investment Research

Is there a lot of competition in terms of trying to get these patients? I know of a couple other stroke trials going on but nothing seems massive out there and it seems like there’s obviously a large number of stroke patients. So what do you think are the one or two main reasons for the slow enrollment?

Martin Rosendale

Well, I have to be a little careful that I don’t get too much into conjecture here but we haven’t seen a lot of direct competition over sites. Most of the sites that we’ve contacted and that have expressed interest are sites that aren’t doing one of the other studies that you mentioned you’ve seen out there. So we’ve not seen a lot of competition directly for the sites. And you’re right – there are a lot of stroke patients out there.

I think in analyzing it retrospectively we’ve seen a couple of things. One, we’re catching these patients and their families at a time when they’re just dealing with something that has a profound effect on them and their lifestyle, right? And they’re having to make a lot of decisions about how to care for their loved one, the impact it’s going to have on their life and it becomes challenging for them to make another decision such as one around whether or not they should consent to a clinical trial. So we’ve seen that.

We’ve also talked to others in the industry and we’re finding that we consistently hear that cell therapy studies can be difficult to enroll. And this is something that I hope we can address as an industry, and I’ve had some conversations with others in this space and it’s because of a perception by the layperson of what a cell therapy is and what a stem cell is and frankly what it is not. And so I hope through organizations like [AARM] and others we can as an industry address that and better educate the population so that they’re not nervous or afraid of cell therapies in the context of stem cells.

Jason Napodano – Zacks Investment Research

Thanks for answering all my questions, guys, and congrats on the Arthrex deal.

Martin Rosendale

Thanks, Jason.

Operator

Thank you. And now I’d like to turn the call back over to Martin Rosendale for closing remarks.

Martin Rosendale

Thank you, Operator. So once again I would like to thank everybody for joining us this morning. I realize that for many of you especially out on the West Coast it’s quite early. Just to reemphasize we are very excited about our announcement last night with respect to the Arthrex partnership and I’ll look forward to reporting on our progress next time. Thank you very much.

Operator

Thank you for your participation in today’s conference call. That concludes the presentation. You may now disconnect and have a good day.

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