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Cellular Dynamics International (NASDAQ:ICEL)

Q4 2013 Results Earnings Conference Call

March 11, 2014, 8:00 a.m. ET

Executives

David Snyder - Chief Financial Officer

Bob Palay - CEO

Analysts

Tycho Peterson - JPMorgan

Doug Schenkel - Cowen & Company

John Sullivan - Leerink Swann

Operator

Good day, ladies and gentlemen, and welcome to the Cellular Dynamics fourth quarter 2013 financial results conference call. [Operator instructions.] I would now like to turn the conference over to David Snyder. Sir, you may begin.

David Snyder

Good morning. Welcome to the fourth quarter 2013 conference call for Cellular Dynamics International. My name is David Snyder. I’m the company’s CFO. I would like to read you our Safe Harbor statement before turn the call over to our CEO, Bob Palay.

This presentation contains statements including financial projections that are forward-looking in nature. These statements are based on management’s current expectations or beliefs and are subject to known and unknown risks and uncertainties regarding expected future results.

Actual results might differ materially from those projected in the forward looking statements. Additional information concerning risks that could cause actual results to materially differ from those in the forward looking statements is continued in Cellular Dynamics’ annual report on Form 10-K, filed with the Securities and Exchange Commission on March 10, 2014, which risks are incorporated herein by reference, and as may be described from time to time in Cellular Dynamics’ subsequent SEC filings.

Any forward looking statements in this presentation speak only as of the date hereof. The company assumes no obligation to update or revise any forward looking statements. Now I’ll turn the call over to Bob.

Bob Palay

Thank you, David. Good morning. I’m very pleased with the company’s performance in the fourth quarter. As many of you know, CDI’s goal is to become the industry standard for manufactured human cells, and a dominant player in this rapidly emerging field.

This quarter, we demonstrated good progress toward this goal. Before I walk you through some of the highlights of this quarter, I want to walk you through a brief overview of our business, and the opportunity in front of us.

CDI’s products are based on induced pluripotent stem cells, IPSC, technology. Using CDI’s proprietary and patented episomal method, we induce some of those cells from a standard doctor’s office blood draw to become IPSCs.

The resulting IPSCs have two important attributes. First, IPSCs naturally differentiate into any cell in the adult human body. Second, IPSCs can be grow in culture, and will continue to divide and expand while remaining fully pluripotent stem cells. Thus, once we have created an IPSC line, we can continue to expand it. These two attributes, pluripotency and indefinite expansion, make the IPSC the ideal seed stock for manufacturing human cells.

The second step in our manufacturing process is to turn IPSCs into the various cells in the human body. Transforming IPSCs into large quantities of the precisely specified cell types we wish to manufacture is a difficult process.

As far as we know, CDI is the only company to have industrialized this process. Our products are designed to penetrate three target markets: the $3.5 billion market for in vitro use of cells in drug discovery, toxicity testing, and chemical safety; the $1.3 billion market for stem cell banking; and the $5.0 billion market for in vivo cell based therapeutic research and development.

We currently have two primary product lines, our iCell product line and our MyCell product line. Our product matrix is potentially every cell in the human body by potentially everyone’s genetic background. We believe that the fact that our products are developed and manufactured to specifications based on IPSC technology gives us a significant competitive advantage in pursuing the market opportunity and building out our product matrix.

Our iCell product line currently includes four different cell types: iCell cardiomyocytes, iCell neurons, iCell hepatocytes, and iCell endothelial cells. All of our iCell products are based on a standardized genetic background, and are sold cryopreserved as a consumable that our customers need to reorder after use.

Our second product line, MyCell, began shipping in the second quarter of last year. MyCell is another product extension strategy by which we make an existing cell type - for example a cardiomyocyte - from different individual genetic backgrounds.

If a customer wants to compare cardiomyocytes from different genotypes, that is different individuals, all they have to do is place a MyCell order with us, ship us properly consented blood samples, and we will ship them MyCell cardiomyocytes made from the IPSC lines we manufactured from those blood samples.

We have developed and anticipate that we will continue to develop our product matrix in collaboration with our customers, so that the cells we make meet their research needs. On the iCell side of the matrix, our current development efforts include multiple additional cell types: ICell hematopoietic progenitor cells, iCell cardiac progenitor cells, iCell astrocytes, iCell nociceptors, iCell dopaminergic neurons, iCell skeletal mycoytes, and additional iCell products we’ve yet to disclose.

On the MyCell side of the matrix, we often get commercial rights to the IPSC lines that we make for MyCell, adding genetic diversity to our product matrix. We believe that both our continuing iCell products in development and our MyCell products are helping us fill out the product matrix opportunity I talked about earlier.

So to reiterate, our strategy is to continue to launch products and focus on increasing customer use in the potential product matrix of any cell from any genetic backdrop. We are targeting our products at three target markets: the in vitro cell market, the stem cell banking market, and the cell therapy research and development market.

Our goal is to set the industrial standard for manufactured human cell products and become a dominant player in a combined market of approximately $10 billion. So as you evaluate us as a company, I encourage you to think about us as I do. Is CDI making progress on its long term strategy?

Let me walk you through some of the highlights from the fourth quarter, which include rapidly growing acceptance of our iCell product line in the in vitro market, especially with large customers. Some evidence includes continued rapid revenue growth.

Annual revenues increased by 81%. Revenues for the fiscal year 2013 were $11.9 million as compared to $6.6 million for the fiscal year 2012. Revenues in the fourth quarter of 2013 were up 41%, totaling $4.2 million versus $2.9 million in the same period in 2012.

Similarly, our sales to large customers increased by 87% year over year. Our average cells to our top 10 customers for the fiscal year 2013 was $880,000, up from an average of $445,000 from the fiscal year 2012.

We also would like to point out that our revenue from Eli Lilly in 2013 exceeded $2 million, while revenue from AstraZeneca also approached the $2 million mark. We believe this progress with our top 10 customers is indicative of our continued penetration in the top 20 biopharmaceutical pharma accounts.

This more than 80% increase in year over year revenue was based primarily on our sales of iCell products and collaborations in the in vitro market. We also announced our deal with a world-leading food company. As noted in an article in The Wall Street Journal, CDI signed a supply deal with Nestle to provide them with our iCell and MyCell products for use in human nutrition research. We’re excited by this expansion of our customer base into the food industry.

To sum up, revenues in the in vitro market continue to grow at a rapid pace. Penetration of our top accounts continues to increase and new customers are applying our products in new and exciting ways.

In addition to our performance in the in vitro market, we continue to penetrate the stem cell banking market. During the fourth quarter, we announced the $6.3 million contract with Coriell, which supplements our existing $16 million project with the California Institute of Regenerative Medicine to make IPS lines from 3,000 patients.

This brings our total serum-related contracts to $22.3 million. We also announced projects with the Jain Foundation and the Hamner Institute, providing further evidence of the traction we’re getting with our MyCell product line within the stem cell banking market. All of these projects take advantage of our proprietary episomal reprogramming methodology, for which we received an issued patent during the fourth quarter of 2013.

Our goal is to increase our penetration of the stem cell banking market. Along these lines, we continue our business development efforts to sign more banking deals, targeting large government banks like CERN and also commercial entities such as cord blood banking firms.

Our efforts in the in vivo cell therapy research market continue to be focused on business development efforts with both industry and academia. We believe that CDI’s ability to develop cells to precise specification and then scale the manufacture of these cells offers unique benefits to cell therapy companies. Over the course of the next several years, we expect the in vivo cell therapy aspect of our business is to begin to produce revenue and lead to additional growth.

Finally, our intellectual property portfolio continues to grow. We now have over 800 issued patents and patent filings, both foreign and domestic. We plan to continue to grow this portfolio over the coming years.

I’ll now turn over the call to our chief financial officer, David Snyder, who will discuss our financial performance.

David Snyder

Good morning. I’m delighted to have the opportunity to share with you the financial results for Cellular Dynamics for the fourth quarter of 2013. At a high level, the financial story for the fourth quarter continues many of the same themes we discussed in our third quarter call.

As Bob mentioned, we did grow revenue at an attractive rate. We reached an important milestone for the company, generating over $2 million of annual revenue from our relationship with Lilly and nearly $2 million of annual revenue from AstraZeneca.

Our gross margin from product sales continues to be strong. We believe gross margin of 73% for the fourth quarter and 71% for the year represent attractive performance. And we also continue to be in a good cash position, with $62 million in cash resources with which to continue to pursue our strategic objectives.

We’ve made much mention of the CERN contract. In the fourth quarter, we received the initial quarterly payment of $1.1 million in cash from CERN, $924,000 of which was on our balance sheet in deferred revenue as of December 31. The $182,000 difference was recognized as revenue in the fourth quarter.

Like last quarter, our operating costs did increase. I’ll give more color on that when I go through the departments in detail, but the short answer is that we’re ramping development of our hepatocyte product line and as a consequence we incurred significant reagent and supply expense in our research and development group.

We also increased staffing and sales and marketing to meet growing customer demand and we’re now bearing these administrative costs of being a public company.

Having made mention of those highlights, my intention this morning, like last quarter, is to talk through our financial statements as they have been filed, try to clarify how some of the major accounting matters of the quarter are dealt with in those statements, and then provide some color into the underlying operational activities that gave rise to our reported financial results.

Turning first, then, to our balance sheet, obviously our cash balance dominates other accounts on the balance sheet. Last quarter, I called your attention to our growing inventory balance, reflecting our production in anticipation of forward sales. Inventory in the fourth quarter continued to grow, though at a slower rate.

As I mentioned last quarter, we are building inventory in advance to meet anticipated demand and because we cryopreserve our products, this ability is unique to our company. Having said that, the big change was in accounts receivable, which grew $1.9 million at the end of the third quarter to $3.3 million by the end of the year.

This reflects, in general, the significant growth in sales over the fourth quarter, but also the specific bookings of collaborations, partnerships, and other revenue near the end of the quarter. The other notable change in the balance sheet I already alluded to, and that was the increase by $913,000 in deferred revenue. This is principally from cash received from CERN, net of recognized revenue.

Now I’d like to walk through the statement of operations in some detail. I intend to go through each line item briefly in a moment. First, I’ll just remind those new to our reporting to be cautious in comparing quarter over quarter earnings per share. We present what appears to be a rather odd result, which simply reflects the significant difference in common shares outstanding pre- and post-IPO, due principally to the conversion of the preferred shares, but also, of course, due to the additional common shares issued in the IPO.

Turning now to the statement itself, and working down, top to bottom, let’s first examine revenue. Revenue grew 41% for the quarter, from $2.9 million to $4.2 million, and 81% ftfy2, from $6.6 million to $11.9 million. The total number of customers sold to in the fiscal year is up from 128 as of December 31, 2012 to 150 as of December 31, 2013.

And, average revenue from our top 10 customers, which we believe is one of the most important metrics of our progress, has increased from $445,000 for the fiscal year ended December 31, 2012, to $830,000 for the fiscal year ended December 31, 2013.

Addressing now each component of revenue, our growth in revenue from product sales came principally from growing unit volume on our cardiomyocyte product line. Also, as promised last quarter, we did deliver MyCell revenue in the fourth quarter. Revenue from collaborations, partnerships, and other revenue grew over both the three-month and 12-month periods, primarily from our center of excellence relationships with both Lilly and AstraZeneca.

For the fiscal year, Lilly accounted for 18%, or $2.1 million in total revenue, and AstraZeneca accounted for 15%, or $1.7 million, in total revenue. Please do be aware that a portion of our revenue from both Lilly and AstraZeneca is captioned as product sales.

Other large contracts, [unintelligible], collaborations, partnerships, and other revenue includes $533,000 for the year relating to a grant awarded by the National Institutes of Health and the National Heart, Lung, and Blood Institute to the Medical College of Wisconsin.

Also as promised last quarter, we recorded our first revenue on the CERN contract, albeit a modest $182,000. We did receive $1.1 million from CERN in the first of what will be routine quarterly payments. Those payments are received in advance and recorded as deferred revenue.

We believe those quarterly payments are a reasonable indicator of what we can anticipate for quarterly revenue from CERN throughout 2014. In November of each contract year, the quarterly payment amounts will be adjusted in anticipation of the work anticipated in the forward 12 months.

Looking now to cost of product sales, as we indicated in our public filings, we believe that the difference between product sales and cost of product sales is an important measurement of our performance. We characterize this difference as the gross margin from product sales, and the ratio of this difference to product revenue we characterize as our percentage gross margin from product sales.

Just as a reminder, the cost of delivering revenue captioned as collaborations, partnerships, and other revenue are reported as part of research and development expense, so we believe a comparison of total revenue to product cost of sales may not be a helpful metric.

For the fourth quarter, our percentage gross margin from product sales was 73%. For the fiscal year, gross margin was 71%. Our gross margin over the course of last year reflects reductions in both material and overhead costs, as well as reductions in royalty costs on our currently marketed version of iCell cardiomyocytes.

I hasten to emphasize that while we are proud of those margins, we do believe that future gross margins will continue to vary due to changes in product mix, average sales prices, and the introduction of new iCell products, which may have cost characteristics that differ from our existing products. We believe that particularly, due to new product releases in 2014, our product gross margins are likely to be lower than those observed in fiscal year 2013.

Continuing down the expense captions, I’ll note that research and development expense for the three months grew $1 million, from $3.9 million to $4.9 million, and for the fiscal year, grew $2.3 million from $14.3 million to $16.6 million.

Materials and supplies expense accounted for the majority of the growth in R&D expenses. these items have been used generally in the development of new cell types, but in the fourth quarter, particularly for hepatocytes and dopaminergic neurons. Hepatocytes have been sold for revenue to a number of customers who are using these products for validation and early release testing. Such revenue is captioned as collaboration partnerships and other revenue.

Going forward, we do not expect to materially grow R&D costs attributable to new product development. However, R&D costs in the aggregate will show significant increases in future quarters, because the cost of performing the CERN contract are captured within R&D expense and the costs associated with producing hepatocytes will continue to be captioned as R&D expense until such time as we classify revenue from hepatocyte sales as product sales. At that time, the costs associated with hepatocyte revenue will be captioned as cost of product sales.

Next, turning to sales and marketing, like last quarter not much to report here, other than the ongoing success the team has had in building our business. We grew headcount over the past year from 25 to 29 to support ongoing growth and expand both sales and broad marketing activities.

Lastly, turning to general and administrative expenses, quarterly general and administrative expenses actually declined from the third quarter, from $3.7 million to $3.1 million. You’ll recall in the third quarter we recognized an aggregate of three quarters worth of incentive compensation and three quarters worth of board fees, each triggered by our IPO.

I detailed those expenses on our third quarter call, and I refer you to the transcript of that call as well to our report on form 10-Q for those details. In general, the fourth quarter only includes its pro rata share of the ongoing costs triggered by our IPO. Hence, we expect the fourth quarter results provide a reasonable measure as to what our quarterly general and administrative costs may be throughout 2014.

And Bob, that concludes my comments.

Bob Palay

Thank you, David. To summarize, CDI experienced rapid - over 80% - growth during 2013, primarily from our iCell products currently targeted at the in vitro market. These products continue to turn out a healthy annual gross margin of 71%.

In addition, we signed two CERN-related deals totaling $22.3 million. These agreements mark our strong entrance into the stem cell banking market. Our game plan is to continue to invest in new products and the rapid market penetration of our existing products in order to capture a significant share of an approximately $10 billion mkt.

We are a young company, in a rapidly emerging field. Our results are likely to vary from quarter to quarter and year to year, but our goal is clear. We encourage our investors to evaluate us as I do, based on our progress toward our goal of setting the industry standard for manufactured human cells.

Thank you for joining us this morning. And now I’d like to open up the lines for questions.

Question-and-Answer Session

Operator

[Operator instructions.] Our first question is from Tycho Peterson of JPMorgan.

Tycho Peterson - JPMorgan

Can you just give me some additional color on some of the pharma projects you’re working on? Maybe just what degree is that work kind of evolving towards center of excellence models and beyond traditional [ADME] tox studies?

Bob Palay

What’s happening with our top 10 customers, the biopharma, is the following. Historically, we entered into what you’re calling the tox market, particularly our cardiomyocyte product, because that’s an area of the pharma business that’s pretty competitive. We picked that on purpose, because that way they can share and publish papers on the model.

And just before we get into the next part, just to get a sense of our penetration there, and how strong it is, we really encourage people to go to SOT, the Society of Toxicology, meeting, and see the number of presentations regarding our products and the number of posters.

But what’s been happening is the customers are starting to move to screening our cells for discovery purposes. And our neuron product and many of the subsequent products we’re going to be offering are focused into that market. And so we’re seeing an uptick.

So I think the way to think about it is, COE deals are nice, because it’s an example where Lilly and AZ basically buy all our products. In a center of excellence deal, they buy our standard products, like iCell cardiomyocytes, neurons, hepatocytes, endo. But they also are doing custom reprogrammings. In other words, they’re buying MyCell.

And finally, the interesting thing there is that in those instances they’re also paying us to move some of the cell types up in our product development pipeline because they’d like them earlier. So you sign those CEO deals, very exciting, but also, I think you’ll see, over the next year, there will be screening deals, or customers using our cells in a screening way, that aren’t in COE.

And in some ways, I like that, because a COE, deal, because it’s a big deal, they expect price concessions where, when they’re buying outside of a COE deal, and just buying off our normal price list. So I think you’re going to see that evolution, you’re going to see more screening. As we talked in the past, GSK used our neurons to create novel models for Alzheimer’s.

Our hepatocytes are environmentally infectable, which means if you can put basically plasma from somebody who’s got hepatitis, do your seed on our hepatocytes, and they’ll virally infect, and the entire virus life cycle happened within our hepatocytes. That’s a great discovery tool for companies that want to look at our hepatocytes.

So, like I said, I think you’re going to see, over the next several years, more and more screening activity. And as we release more and more products, that opens us to more and more screening opportunities.

Tycho Peterson - JPMorgan

And then maybe on the MyCell products, can you talk through the uptake in traction you’re seeing there, and maybe some initial feedback you’ve received from customers?

Bob Palay

It wasn’t large last quarter, but we expect significant MyCell revenue over the course of the year. We’re getting very positive feedback on it. It was $220,000 for last year, we expect significantly more in the coming year. About $52,000 per quarter. And we expect much more for the coming year. The customers are very excited about this. This is their opportunity to easily study the differences between individuals and do that in specific cell types. And I think over the course of the year you’re going to hear some exciting things from us in that regard.

Tycho Peterson - JPMorgan

You touched on the recent supply agreement with Nestle. Can you maybe help us size the nutritional research end market?

Bob Palay

We don’t have data around that available, but the world’s largest food companies have giant [cells]. My guess would be larger than the pharmaceutical business. And I think the idea that you can now study human nutrition on human cells opens up new doors to really understanding their products better.

And besides Nestle, we’ve got other companies approaching us with some out of the box projects, so we think that’s very large. We don’t expect that to be a large component of revenue in 2014, but as you look out over the following years, we think that besides pharma, there’s opportunities for us in chemical safety, in cosmetics, and in the food industry.

And I’m going to talk about chemical safety for just a minute, where if you think about it, there’s millions of compounds in chemicals, out in commerce. Very few of them are tested for their safety. Our iCell products allow you to test them on human model systems in a way that you just couldn’t do before. An example is Jamie Thompson is giving a talk at SOT this year about just that concept, the use of human cells for environmental testing.

Operator

Our next question is from Doug Schenkel with Cowen & Company.

Doug Schenkel - Cowen & Company

You guys did not provide any full year guidance for 2014, correct?

Bob Palay

That’s correct. The interesting thing is the analysts seem to really want us to do that, but it’s our board policy currently not to do that.

Doug Schenkel - Cowen & Company

In the fourth quarter, your revenue per top 10 customer grew about $1.25 million on an annualized run rate basis, which I believe is by far the best revenue performance we’ve seen from that group. Putting aside the concentration for a second, can you just talk a little bit about what’s driving growth from these customers, and specifically how much of the growth is driven by increased use of iCells that they were already using versus expansion to newer iCell lines?

David Snyder

I’m not certain where your number came from, and so I don’t want our silence to acknowledge that we accept it. The number that we’re reporting is the $880,000 for the trailing 12 months.

Doug Schenkel - Cowen & Company

Yeah, and we obviously have some previous data, so you can back into what the Q4 performance was. But fine, clearly things are ramping there. So if you don’t want to get that specific, that’s fine, but bottom line is, really the prep for the question is, what’s driving growth in these customers? Is it adoption of new lines? Or are you getting them to use existing lines more?

Bob Palay

It’s a mixture of both. In particular, they are increasing their use of the iCell cardiomyocytes and neurons. They’re very interested in increasing hepatocyte use. And also, the center of excellence deals, we’re starting to deliver MyCell under those, and we’re developing new cell types for them. When I say for them, these are cell types we were planning to develop. They just moved them up.

So I think what you’ll see over time - though quarter to quarter is really hard with us - is that these customers continue to increase their sales and then continue to increase their usage, because they start to use our different cell types, and what happens is that the cells we sell penetrate into different departments in these large customers. If we sell hepatocytes, that's to the virology group. When we sell neurons, that’s for the CNS group. Cardiomyocytes is for tox and for cardiac disease.

So once you start getting into these departments, start using our product and standardizing on it. So we’re very excited about the fact that the top customers are continuing to increase their purchases.

Doug Schenkel - Cowen & Company

So as we look ahead, really two questions. First, if you look back over at least the last several quarters, revenue per top 10 customer has been increasing. So the first question is, is there any reason to think that that’s not going to continue quarter to quarter moving ahead? And secondly, about a third of your revenue is accounted for by two customers, as you noted in your prepared remarks. What’s your visibility on the outlook for demand for those two customers?

Bob Palay

Well, with Lilly, we have an agreement, so we have pretty good outlook. So it’s pretty clear what it will be there. Like I said, it’s hard for us to predict quarters and years. And those two customers are our top customers, but when we look at our top 10, that group changes over time. People can just pop up.

Doug Schenkel - Cowen & Company

In 2012, you doubled your number of customers, or about that, adding about 66. In 2013, somewhat because of the law of large numbers, the rate of customer growth moderated on a percentage basis, but in actual numbers, I think you added about 24 versus 66 the year before.

As we look ahead to 2014 and beyond, and again, this isn’t a quarter to quarter question, it’s really a multiyear question, how much emphasis are you placing on driving increased revenue per customer versus expanding the customer base? And accordingly, how are your commercial efforts evolving?

Bob Palay

First of all, specifically on your question, what we do is that number is the number of active customers in the last year. And understand that academics can be on 16-18 month grand cycles. So when you say adding customers, it’s the total customers of that year, the total number of customers we’ve had historically is larger than 150, but we don’t track that.

So we anticipate that the number of customers will continue to grow. But on the other hand, we’ve already penetrated, as we said in our 10-K, 19 of the 20 top biopharma firms by R&D budgets. So we can’t add another 20 of those. So I think what you’ll see is our focus is to do both, go deeper into our accounts, and continue to expand the accounts.

But we believe that our focus over the next year is going to be on what we call application development. In other words, for customers to go to high-volume usage, they have to have applications that permit that usage, or encourage that usage.

And to do that, we spend a lot of time and effort on our application development group and technical support group to make sure that iCells work on standard laboratory equipment used in high-throughput experimentation. And it can be things as glamorous as teaching correct plating methodology or as sexy as making sure that the software properly reads our cells. Because human cells react differently than animal cells in many of these systems.

Now, it’s sort of what I’d call the dirty work of market penetration, and that I think you’re going to see more effort on our part, as opposed to more cell types. We will be launching more cell types, but as opposed to putting our R&D dollar into expanding the number of cell types, like we have in the past, I think you’re going to see more of our focus on expanding the depth of penetration of our customers by focusing on this less glamorous work of applications development.

David Snyder

Just the close the point, the idea, I think, is really to drive the average spend per account.

Bob Palay

There’s two other things going on underneath that I think you should be looking for over the next several years, that I think will drive significant revenue growth. One is the expansion of our stem cell banking business. We have an active business development effort with cord blood banking firms. We think that they’ve identified customers who may be very interested in having IPSC lines made for them. And so we have a business development effort going where we are looking to collaborate with these types of firms to help us market into this market.

The second one, which we think is a very large market - it’s the largest of the three markets we talk about - is [os] manufacturing cells for cellular therapeutics. And the business model there currently is the following. Our expertise, the special thing we bring to the table, is ability to develop cells to precise spec - in this case a therapeutic spec that we develop in collaboration with a partner - and then manufacture at scale.

And we believe that we’re ready now to offer that to the cell therapy world and are in an active business development effort there too. So to summarize, the game plan is continue to expand in the in vitro market the number of customers, but really focus on penetration, larger penetration in those customers, expand our stem cell banking business and move into cellular therapeutics, research and development in that.

Operator

Our next question comes from John Sullivan of Leerink.

John Sullivan - Leerink Swann

Just to follow up on the road you guys just went down and having to help facilitate the customer’s use of your product in order to increase your volumes, it sounds like you’re thinking more about solution selling. Are you actually thinking about selling not only a product but a service at some point in the future, and actually conducting work for your clients in your facilities using your products?

Bob Palay

The current business model is to put ourselves inside of as many applications as possible. We in some way think about the various uses I’ve outlined as different applications. So the idea is to sell our cells as a consumable while driving down production costs so that we can offer that at what we call a high product gross margin.

So that’s the plan for going forward, and we don’t currently have plans to move into the service area. Our concern there is we don’t really want to compete with people offering the service. We prefer to put the cells in their hands. We think that will lead to the most rapid expansion. In other words, what I’m hearing you suggest is in some ways competing with CROs and other service companies. And that’s not our plan.

John Sullivan - Leerink Swann

And then I guess, similarly, from a long term strategy standpoint, would you consider using your proprietary and differentiated products in your own drug discovery efforts at some point?

Bob Palay

Not in our current plan, no. Because again, that competes with our customers. Our game plan here is we call it the iCell operating system. And I know you’re of a similar era to me, so you might appreciate the analogy, which is we think of ourselves as sort of Microsoft/Intel, and our cells are something that you can build on top of.

You can build assays, you can build cell banks, you can build cell therapeutics. There’s even some companies that are working on making 3D models with our cells. We want to encourage all that. We want to create that basic building block that the life science community can build on and make great applications for manufactured human cells.

So our plan is to, instead of trying to out-innovate the world, to encourage the world to innovate on our platform. And that’s been our strategy from day one. I don’t see in the near term deviating from that strategy. We’d like multiple pharma companies discovering on our platform, and we’d like multiple cell therapy companies partnering with us to create the next generation of cell therapy.

Operator

I’m showing no further questions at this time. I would like to turn the conference back over to Bob Palay for closing remarks.

Bob Palay

We’d like to thank everyone for joining us today. As you can see from both our tone of voice and our results, we’re very optimistic about the future of our company. We think that we have a strong position, that we’re the leader in the field, and have a long run rate in that position. So thanks, everyone, for joining us.

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