Cytori Therapeutics' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Cytori Therapeutics (CYTX)

Cytori Therapeutics Inc. (NASDAQ:CYTX)

Q4 2013 Earnings Conference Call

March 11, 2014, 05:00 PM ET


Christopher Calhoun - Chief Executive Officer

Marc Hedrick - President

Mark Saad - Chief Financial Officer

Clyde Shores - Executive Vice President, Marketing and Sales


Steve Brozak - WBB Securities

Jason Kolbert - Maxim

Yale Jen - Laidlaw & Company

Keay Nakae - Ascendiant Capital


Good afternoon, ladies and gentlemen. Welcome to the Cytori Therapeutics Fourth Quarter 2013 Earnings Results Call. (Operator Instructions)

Before we begin, we want to advise you that over the course of the call and question-and-answer session, forward-looking statements will be made regarding events, trends and business prospects, which may affect Cytori's future operating results and financial position. Some of these risks and uncertainties are described under the Risk Factors section in Cytori's Securities and Exchange Commission filings, which Cytori advises you to review. Cytori assumes no responsibility to update or revise any forward-looking statements to reflect events, trends, or circumstances after the date they are made.

It is now my pleasure to turn the floor over to Chris Calhoun, Cytori's Chief Executive Officer. Sir, you may begin.

Christopher Calhoun

Thank you. Good afternoon, and welcome to our year-end 2013 financial results and business update. I am joined today by Dr. Marc Hedrick, our President; Mark Saad, our Chief Financial Officer; and Clyde Shores, our Executive Vice President of Sales and Marketing.

2013 was a year of progress and focus for Cytori, consistent with our four principal objectives established for the year. First, we spent considerable time and effort, laying the foundation for successful U.S. clinical trial program in heart failure, including optimizing the ATHENA and ATHENA II trials. Second, we achieved all three of the proof-of-concept BARDA contract milestones on budget and ahead of schedule.

Third, we continue to generate increasing demand for our products and services. And fourth, we strengthen our cash position and balance sheet, bringing in approximately $35 million without going to the capital markets and Wall Street, including establishing a strategic partnership with Lorem Vascular, valued up to $531 million.

Total product and contract revenues increased 14% in 2013 to $10.4 million. Product revenue was under our forecast at $7.1 million, a decline of $1.6 million compared to 2012. Contract revenue was slightly ahead of our forecast at $3.3 million for the year. An additional $3.6 million in product demand was filled before the end of the year, but the revenue has been deferred into 2014, based on a revision to our revenue recognition policy.

Additionally, we continue to strengthen our intellectual property position. We are going into our sixth year of averaging at least one new issued patent per month. We obtained 12 new patents in 2013, have 65 issued patents to date and more than 85 applications pending worldwide related to current and future generation ADRC-based therapeutic uses, methods and devices.

We in-licensed rights to two patents related to our sports medicine and autoimmune disease platforms. And two additional patents have been allowed, one related to our orthopedic platform and another related to our wound-healing platform and BARDA.

2014 is on track to be our most important year-to-date with five impactful milestones that we expect to achieve, each of which we believe are fundamental in unlocking the value of our technology. These include completion of the ATHENA clinical trial enrollment, publication of long-term data from our PRECISE clinical trial, expansion of the BARDA contract and funding a U.S. clinical trial in burn repair, to increase product and contract revenue and to achieve approval in China for the Celution System.

Before we move into the Q&A, I'd like to take a few minutes to discuss each of these items in more detail. Let's start with our cardiovascular pipeline.

The key value driver for our cardiovascular program is the completion of enrollment in our ATHENA pilot Phase II B trials and subsequent evaluation of the trial data. Demonstrating continued safety and a clear signal of efficacy in treated patients, we believe will provide a clear path to a U.S. FDA approval trial and ultimately marketing approval and reimbursement.

The ATHENA trial program, which is the first of its kind in the U.S., includes two double-blind placebo-controlled trials for patients with chronic refractory ischemic heart failure. The ATHENA and ATHENA II trials will each include 45 patients with 30 randomized to ADRC therapy and 15 to receive placebo-controlled. ATHENA is treating patients with the same cell dose that was delivered in the PRECISE trial and ATHENA II will treat patients with double the ATHENA dose.

While we initially intended to complete enrollment in ATHENA last year, we submitted protocol changes to the FDA and each of the institutional review boards regarding the ATHENA trial which essentially paused the trial until all of the amendments have been approved.

These important changes were designed to harmonize the ATHENA and ATHENA II trials, optimize the inclusion and exclusion criteria to help facilitate enrollment, while not sacrificing quality or safety of the trial. And also to ensure that these trials are designed to achieve the end points that will allow us to rapidly move directly into a U.S. approval trial.

As of February 2014 and for the first time, since the trial was initiated, all eight ATHENA clinical sites are actively screening patients. The 23rd patient was treated last week and there are several more patients scheduled for treatment this month, including one tomorrow.

A leading indicator for enrollment is the number of patients in prescreening or screening, which is now at a record level with 18 patients at seven ATHENA sites. Despite the challenges in initiating our first U.S. clinical trial, all sites are now active and momentum is building.

Based on our current enrollment rate and leading indictors, enrollment for ATHENA is tracking towards completion during the second or third quarter. The FDA has allowed two more sites in ATHENA II than the ATHENA trial. So while we are maximizing our focus on getting ATHENA enrolled first, we can simultaneously initiate ATHENA II in parallel.

The first ATHENA II site is now active and the first ATHENA II patient is being treated right now and the second patient is scheduled to be treated tomorrow. Once the ATHENA trial is complete, the active centers will immediately transition enrollment into ATHENA II to maintain the momentum and accelerate enrollment in ATHENA II.

Depending on the enrollment rate for ATHENA, we anticipate the ATHENA II trials will be fully enrolled around the end of the year or first quarter next year. Looking forward, the ATHENA program has been designed and updated to optimize our path to an approval trial and ultimately market approval and reimbursement.

In the fourth quarter of 2013, our management team along with select clinical investigators from the ATHENA trial, met with the FDA to discuss the path forward and allowable pivotal trial endpoints. While no final decision has been made at this early point, the FDA indicated that it maybe amendable to an approval trial design, based on functional and quality of life endpoints.

Based on that guidance, the size, risk, timeframe and cost of our U.S. pivotal trial will all be reduced considerably compared to a mortality and re-hospitalization based trial. We have previously completed the PRECISE trial, a double-blind, placebo-controlled, multi-center trial in European patients with chronic ischemic heart failure.

As previously reported at major cardiovascular symposia, the PRECISE trial demonstrated statistically significant improvement in exercise capacity over placebo, a clinically relevant endpoint. The long-term follow-up data from this trial is in the final stages of peer view and publication is anticipated this year. Our U.S. ATHENA trial program is predominantly based on this safety and feasibility trial.

Now, let's turn to BARDA. A core priority in 2013 was completing the three deliverables for our BARDA contract and that was accomplished on budget and ahead of schedule. Our BARDA contract award in the fall of 2012 may provide up to $106 million to fully fund the regulatory and clinical trials required by FDA to gain approval for Cytori's solution system, for the treatment of targeted soft tissue injuries.

Specifically, BARDA is seeking a primary medical countermeasure to the effects of an attack with an improvised nuclear device. In this scenario, the nation's trauma system could be overwhelmed with patients with a combined injury, including radiation exposure and thermal burns.

The key benefits of this contract to Cytori if all options are exercised are that, one, it provides a fully-funded commercial path to a market that includes the world's largest customer, the U.S. government. Second, it supports the funding and development of our next-generation Celution System. And third, it provides at least one path through FDA for a meaningful clinical application in skin and soft tissue repair.

In addition, upon FDA approval or prior to approval in certain circumstances as deemed appropriate by BARDA, the U.S. government has the option to purchase and deploy the Celution System as a medical countermeasure for national preparedness. Should FDA approval be received after clinical trials, the company has the right to commercialize its cell therapy products in accordance with the claims allowed by the FDA.

The first phase or the base period of the contract is valued at up to $4.7 million. As specified in the contract, there are three objectives in the base period that could trigger up to $56 million in subsequent contract options.

These three objectives are: one, to validate feasibility of a next-generation system; two, to demonstrate that Cytori's cell therapeutic population could be obtained from patients with a severe burn injury; and three, to show efficacy of Cytori's cell therapy products in a novel pre-clinical model of thermal burn with a concomitant radiation exposure.

Cytori believes that it completed all three objectives in 2013. We are actively working with our counterparts at BARDA to schedule and in-process review meeting with the authority's leadership group, to review the achievements and the data and determined the next steps. It is our expectation that the decision will be to expand the guaranteed portion of the contract to include one or more options related to further product and clinical development towards the end goal.

To enable this meeting to be scheduled in the second quarter, the Cytori team and BARDA have a scheduled meeting this month with the FDA to discuss the clinical trial plan for thermal burns. With the FDA's clinical guidance and the strong proof-of-concept data from Cytori, we believe BARDA will have the information necessary to perceive.

I would like to spend a few minutes now explaining our newly announced efforts in sports medicine and orthopedics. In January, Cytori announced that we had received Investigational Device Exemption approval from the FDA, to begin a prospective clinical trial to evaluate the safety and feasibility of Cytori Cell Therapy as a potential treatment for hamstring injuries.

The trial, referred to as RECOVER, has begun as a 10 patient open label study in 2014 at two sites, the Department of Orthopedic Surgery, University of Texas Health Medical School at Houston, and IRONMAN Sports Medicine Institute in Memorial Hermann hospital and at the Kerlan-Jobe Orthopedic Clinic in Los Angelis.

Following the 90-patient assessment of the first 10 patients, Cytori is approved by the FDA to expand recover to a multi-dose, multi-center, double-blind, placebo-controlled trial. The timeline to complete the first phase of the study will be provided once the trial is initiated and Cytori is able to forecast enrollment.

We have been studying ADRCs in acute and chronic muscle injury in the heart for more than a decade, and Cytori Cell Therapy has started to play a role in improving perfusion and reducing inflammation in damaged cardiac muscle. Similarly, we believe ADRCs could support healing in injured skeletal muscle, such as that of a hamstring injury.

Initially, RECOVER involves a minimal incremental investment for the first 10 patients. If successful, RECOVER may provide an accelerated path to market in the U.S., targeting the millions of recreational and professional sports injuries that occur each year.

Globally, Cytori is building a cell therapy sports medicine business. Beyond the RECOVER trial, for several years the company has supported multiple ongoing investigator initiated pilot studies involving professional and amateur athletes with acute and chronic muscle injuries and ACL reconstruction.

We are encouraged by the preliminary data from these pilots, and as a result we have initiated two multi-center registries for sports-related indications in countries where Celution System is available for commercial use. The ACHILLES Registry will collect data from patients with muscle and ligament injuries treated with Cytori Cell Therapy, and the RELIEVE Registry will collect data from patients with osteoarthritis. Both registries will collect patient data and may support future regulatory and reimbursement efforts.

Specifically, powerful stem and regenerative cells that can be obtained from the patient's own fat tissue and delivered to the site of injury has been shown to facilitate and accelerate the healing process in muscles, tendons, ligaments and bones. Time to treatment is important that these cells help reduce inflammation, prevent injured and at-risk cells from dying, increase blood flow, accelerate healing and essentially tilt the balance away from scar and toward regeneration.

This technology also applies to chronic conditions including prior knee, muscle, cartilage and bone injury and damage in retired athletes as well as the much bigger sports medicine applications, common with the aging baby boomer generation. This market is estimated to be the largest market for the emerging cell therapy field, exceeding even cardiovascular disease, due to the extremely high prevalence of sports-related injury and chronic morbidity associated with osteoarthritis.

Now, let's discuss our commercial business. Cytori's commercial business today is focused on offering systems and consumables primarily to academic research institutions and clinicians, performing their own investigator initiated studies or clinical series. We estimate there are now more than 50 investigator initiated studies either completed, in planning or in progress. While these studies represent modest product revenue, these studies are of strategic importance and that they may identify potential new therapeutic applications for Cytori Cell Therapy.

These studies generate valuable clinical data that we may be able to leverage in multiple ways, including supporting regulatory approvals, expanding our commercial business, procuring government contracts and facilitating new partnerships. Additionally, these studies create awareness and familiarity amongst physicians, many of whom are thought leaders and influencers in their respective medical disciplines.

This opportunity in the cell therapy field for Cytori is enabled by our device-based business model, availability of our products with a growing regulatory approval base that now includes 40 countries and affordable products that allow safe and rapid access to the patient's own regenerative cells.

In this early phase of commercialization, we are establishing Cytori's brand and creating a commercial footprint, including distribution, technical support and service, training, medical education and local centers of excellence. In parallel, we are advancing our therapeutic pipeline that targets disease specific indications.

Once the Celution System achieves reimbursement for a specific indication, we will increase our commercial investment for full launch and focus towards rapidly growing device utilization that will increase the lucrative consumable revenue stream.

Additionally, we have augmented our product revenue with contract revenue from BARDA. While we do not know today if the contract will advance into the next larger phases, we believe that we have successfully accomplished all of the initial milestones on budget and ahead of schedule.

Now, entering 2014, we are positioned to continue to grow our commercial business. We are well-positioned in Japan to capitalize on its recent new legislation intended to create an accelerated risk adjusted path to market for cell therapies.

We've expanded into new markets, including Singapore and Australia, where we intend to grow these new markets with our partner Lorem Vascular, who is ramping up its commercial organization, while we work together toward market approval in China. And in Europe, our 2013 Intravase approval coupled with our broad CE Mark approvals for the Celution System, permit on-label sales of our technology for safe intravascular use and for tissue ischemia.

Let's discuss our financial performance. Total product and contract revenues increased 14% for the full year 2013 to $10.4 million. This includes $7.1 million in product revenue and $3.3 million in contract revenue.

While product revenue declined year-over-year by $1.6 million, real demand for the product continues, as an additional $3.6 million in orders was received and product shipped during the 2013 that are expected to be recognized as revenue in 2014, due to a change in our revenue recognition policies according to U.S. GAAP.

The majority of these revenues are for sales in Japan, where in certain circumstances we will defer revenue recognition until the time of payment. Contract revenues increased by $2.9 million over the prior year.

Our net loss for the full year decreased by 20% to $26.2 million or $0.39 per share in 2013 compared to $32.3 million or $0.55 per share in 2012. Cytori in 2013 was $19.7 million of cash equivalents and accounts receivable.

Subsequent to the end of the year, Cytori received final $9 million from the completion of the equity sale as part of the license agreement with Lorem Vascular. Additionally, year-over-year we've reduced our short-term obligations by nearly $8 million.

Overall, we improved the company's capital strength without going to the public equity markets by bringing approximately $35 million through the Lorem partnership, geographic divestiture and through the restructuring of our term loan. Going forward, we continue to evaluate strategic and our financial market transactions to provide the necessary capital position to strengthen the company and to accomplish our near and long-term goals.

In closing, we are focused on delivering on our five principal objectives in 2014, which we believe will drive momentum and increasing shareholder value. These include: completion of the ATHENA clinical trial enrollment; publication of long-term data from our PRECISE clinical trial; expansion of the BARDA contract and funding for U.S. clinical trial in burn; increase product and contract revenues; and to achieve approval in China for the Celution System.

Jackie, I would like to take this opportunity to take any questions that the audience may have for me or my leadership team.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Steve Brozak with WBB Securities.

Steve Brozak - WBB Securities

How should I put this, on budget and ahead of schedule is really always something you want to hear, but can we go back and go over the specifics to what BARDA was looking for. And specifically how and what you had to do, because obviously that's going to be critically important in having investors understand what the value proposition is of what you were able to accomplish? So can you start with I guess the human study and what you had to do there?

Marc Hedrick

The three objectives that we had negotiated with BARDA to get through this first proof-of-concept stage in the contract were very clear and straightforward. The first one was showing that we could take a patient that is in burn and go into that burn tissue and remove the ADRC or stem cell fraction, and that would basically be just as good as a non-burn patient. So that was a key objective that we accomplished early on by looking at human tissue. That was a human study.

The second thing is on the pre-clinical side, we basically had to go backwards, because remember a lot of the things that helped make BARDA enthusiastic about working with us are that reams of human data that we were able to bring to there in breast reconstruction, radiation, wound healing and so forth. So they asked us to go back in a more circumspect way, look at pre-clinical models, [strictly] [ph] pigs and other things, and show that we could repeat in pre-clinical models what we did in patients.

And then finally, BARDA is kind of thinking two or three steps down the road, and okay, how are we going to scale this in the market and what are the -- in their terminology ‘con ops’, how are we going to get this technology throughout the U.S. in all hospital, so that in the event of a disaster, it's pre-deployed and ready to work. And so they asked us to validate some key things on the next-generation system, in terms of making it faster, more scalable, quicker, more cost effective and so forth.

So those are the three things they asked us to do. So these are the three objectives that we believe we hit. And really constant communication with them, we believe that they feel like we've hit those as well.

Steve Brozak - WBB Securities

And I've got a follow-up and I'll do it in reverse order. In terms of today's equipment and future equipment, the equipment that you have right now is capable of doing everything that is required. But obviously people look for a better, faster, easier to handle and an equipment that for all intents and purposes, you can easily transition into, is that an accurate statement?

Marc Hedrick

It is accurate. Current equipment can do everything we need to do, in terms of treating patients with the kinds of things that BARDA would anticipate needing to respond to.

Steve Brozak - WBB Securities

Now, with the current equipment, obviously one of the things that people look is the ability to leverage. So it wouldn't be as if this equipment was just going to be put into moth balls and just pre-positioned. This is something that, in theory, what you look at is to have clinicians and different facilities being able to use this for other indications for other purposes throughout the United States and obviously potentially throughout the world. Is that also an accurate statement?

Marc Hedrick

That's true. Let me give you a little color, Steve. So when going into this discussion with BARDA, I heard a lot about stockpiling and kind of new several companies, whose core relationship with BARDA was built around stockpiling big orders and then renewing that.

I think BARDA felt burned because of that, it wasn't a great economic model for the government, particularly now looking back on it, 10-plus years after 9/11. What they are looking for is new more innovative, more cost-effective models, by which they can partner with companies and get technology available for the public, if they need it.

What they like about ours is kind of one deployment opportunity, where we build it, we take it to market for a variety of things. It's pre-deployed, it's out there. They don't have to stockpile and it's in the market. Doctors are pre-trained using it.

So when the worst happens, a switch can be flipped, and immediately patients can go through a variety of different types of care facilities and be treated in a seamless way. They like that model. It makes total sense to us. Our technology is perfect for that. And I think that's a lot of what's driving their interest.

Steve Brozak - WBB Securities

Number two, in terms of, give us an example of the clinical proofs, not the pre-clinical proofs that you just went through, but the clinical proofs that you had had in your armamentarium to give us examples of what they saw, what you had done previously. Because, obviously, the value proposition is that you have clinical data that basically says, okay, this is what you were able to do. Give us some examples of that.

Marc Hedrick

That starts with believe it or not breast reconstruction. So most of the women that we treated in RESTORE-1 and RESTORE-2, Japanese and European clinical trials and studies related to patients that have had radiation and partial mastectomy was important data, because that data to them showed that we could reverse the effects of radiation. There is really nothing to my knowledge out there that can reverse the effects of radiation to that degree. So I think that was compelling.

The second is that we, based on the breast reconstruction data, we partnered several years ago with the Atomic Bomb Institute in Nagasaki and one of their key researchers there, to take our technology and use it for wounds that although very small market, but a very difficult to treat market, the patient that have had radiation for cancer, had open wounds and were at a risk of dying from sepsis.

So we showed that, not only when the skin was intact, we could repair the burn tissue that when the skin was open and there was an ulcer in the context of radiation, we could heal that. So that was important data. There was several published clinical series supporting that. So that was important.

And then finally, we have taken that beyond just radiation into wound healing in general and showed anecdotally, mainly in some smaller clinical series that it can help heal wounds that would otherwise not heal. So I think add it all that up you had a BARDA team that was very excited about the possibility.

Steve Brozak - WBB Securities

That leaves us with the first item, which is the human study that you just went through, and obviously it is a very difficult study. But give us examples of what you, and I don't obviously want to get in a nauseating detail, but if you can give us examples of what you had to do, what you found, and what may have been surprising in terms of the results? And after that, I'll hop back into the queue.

Marc Hedrick

Just one clarification, Steve. So what clinical study for example?

Steve Brozak - WBB Securities

The human study that you just engaged in terms of collection of samples. I apologize.

Marc Hedrick

So we've developed research protocols with burn centers in our area, who typically take care of medium-to-large burns. The typical treatment pattern for those patients is to remove the burnt tissue and then do some sort of grafting procedure. That burnt tissue that they typically throw away was the subject of the study.

So we took the tissue, took it through our process, and showed that from that tissue we could get viable cells that were perfectly useful and retained all their function. And we did that in multiple patients and multiple samples around different areas of the body. And so that was one of the three key objectives that we accomplished in our proof-of-concept phase.

Steve Brozak - WBB Securities

So obviously this half of the year is going to be critically important so I look forward to the next call that describes it. Thank you again and congratulations gentlemen.


Our next question comes from the line of Jason Kolbert with Maxim.

Jason Kolbert - Maxim

So I want to talk just a little bit about what happened in the fourth quarter, because you have been guiding us to $7 million. And I understand that product revenue while it fell and $3.6 million will probably be recognized in the first quarter, what was that shortfall? And how was performance in Japan?

Mark Saad

I'll address the revenue and shipment number. And like you said, we were guiding towards sales to be higher and would have seen that happen if we had not made a change subsequent to our last call, regarding the way in which we will book revenue. And that is based in observation of a number of cases that we've been tracking, where particularly when you're international with your quick perspective, I think we're in a pretty unique situation as a U.S. medical company, where in many quarters the vast majority of our sales come from Japan.

And so that's a fairly unique situation. So what we've done and have started to do is to maximally align our sales contracts, et cetera, with traditional U.S. GAAP. And that's how we've embarked up on it and have managed the sales process and the accounting revenue recognition side of the equation.

Knowing that Japan is a very different marketplace in terms of culture, everything, and knowing that what we see today on a small scale may well only expand over time. And we think there is a lot of near-term growth that's going to come from Japan, particularly with these new regen med laws, and we are in a unique position with a dedicated team there to capitalize on that.

It was really important for us to get this right and to make sure we're being maximally minimizing future risks, in terms of where a customer could implicitly look at a contract different than the way the explicit language of a contract exists. And so when looking at a number of cases, where that could be the case, we took the step, following a review of the quarter to really put all new customers into effectively a holding pattern from a recognition point of view.

Basically even if they net clean U.S. GAAP contract terms, we would still put an additional filter of, okay, let's still defer to other things, particularly collections, but there is a number of things that we want to make sure are really final and not take revenue risk. And that was something that took place in the fourth quarter review, based on I'd say a number of individual cases, which really made it hard to know prospectively in a given situations, even if the contracts were clean, would it be not better to take more conservative approach overall.

And so given our growth needs and growth objectives, particularly in Japan, we felt in combination of talking with our auditors and committees, if that was the right way to go. So we're putting in place a number of changes like that. And so the outcome there, Jason, was that we had a fairly large number of sales predominantly from Japan. As I identified in that number that we did not take as revenue in 2013, but they were successfully shipped, received and we would anticipate that being picked up this year.

So while that certainly is consistent with what you said in terms of not to be in the fourth quarter, we do think that the inherent demand for the product is there. And now we just want to make sure that we've aligned recognition practices in a way that best protect us going forward.

Jason Kolbert - Maxim

Mark, I totally understand, but does that mean that we should be adjusting our guidance for 2014 or should we make any change to that number, in another words, or is this just a mouse going down a snake and we'll just push everything out a quarter?

Mark Saad

That's a good question, Jason. I think in general, as we look at what our 2014 results will be. We've recognized that you have this existing business, and yes, to the extent that you've got this existing business that's predominantly to researchers, you're going to have that extra, mouse, as you call it, of revenues that's in there that will obviously enhance what we accomplish in 2014.

We'll also have, based on this policy, I think a scenario, where until we see individual customer experiences, particularly in Japan, cleanly go the route of where the customers are really following the U.S. contracts the way we would need them to per U.S. GAAP. Then I think you could safely say, well, we'll probably embed a one to two quarter delay on when a shipment is made, particularly in Japan, and when we'll see the revenue. So I think it's partially true, Jason.

At the same time, I think we can also infer inherent lag of shipments and booking, particularly in Japan, for those customers. So that's one fact I would point out. The other fact is that, while the existing research business has been the nature of link, particularly given whether it's the reimbursement environment or the fact that the market access points really get to a consumable business have not yet been fully put together such that it's really been the capital equipment sale phase that we are seeking to then graduate from to the consumable phase.

To predict exactly how the euro shakeout, given I'd say the large funnel of opportunity, but the inherent variability quarter-to-quarter and the fact that we've got now this Lorem Vascular transaction with the China approval that could have any magnitude on the revenues, as an example, the Japan regulations, which could have a big impact. The implementation of that act is a part that we're really trying to make sure we understand before we go out and say, well, this is how fast our revenues are going to grow now because of these potentially sea changing events.

Instead of doing that, what we're saying is, we're going to keep growing demand for the products. We expect you'll see modest growth on the baseline consistent with that recent business. However, we do have identified inflection points, pivot points, based on defined event such as the Lorem contract, such as the Japan regen med laws, and all we're saying is we want to evaluate those, really make sure we are seeing them implement, and then come back to with, okay, this is what now how we think that's going to impact based on experience rather than getting too far in front of those and how fast it's going to cause our revenues to grow.

So that's how I look at 2014. We should grow, but we know the quarters can be variable, and we're going to come back to you with, as we see Japan and China, and anything else that really moves the needle in that way come back to you as we see those play out.

Jason Kolbert - Maxim

A couple of quick questions, which is, I'd like to come back in offline at another time and talk a little bit about the growth of Japan and China, because you're right. I could see those being very pivotal events. Can we just briefly touch on BARDA, which is, now that you have achieved the three objectives, the next tranche in the contract would be $56 million? How would that be received? There is kind of upfront cash and does that get build against time and material or is that money that you can use as you see fit?

Marc Hedrick

So the short answer is that the cash from that contract will go into a variety of buckets. One is that offsets current burn, so there are current individuals and current projects and development so forth that it would offset. And ultimately, the degree to which it does have the impact depends on what the ultimate negotiated next steps are with BARDA, but that's one area.

Second area is that, it goes to outside contractors. And in particular, if we have hopefully a clinical trial that supported to BARDA, then some of those dollars will go through directly to those potential clinical trial sites and our CROs and so forth that help manage that trial with a profit margin to us.

So the best dollars is a dollar that, in terms of the contract, it comes internally, offsets our current cost, maybe marginally increases our research and development expense, but generally those increased R&D expenses are things that are strategic and important to us anyway. And not as important dollars is a dollar that goes to the outside contractor. And ultimately you'll see a mix of both of those. And that degree and mix will depend on what the final negotiated next steps of the contract can be.

Jason Kolbert - Maxim

I think the most exciting thing I heard in this call was the potential for a QOL endpoint or an endpoint that would not expand on or that would not be mortality driven, and we all understand that dramatically impacts the time and size of the trial. Can you give us any more insight into that? Are we talking about something like Kansas City, KCCQ questionnaire or some composite endpoint? Help us understand kind of where you want that process and when you might expect to have that nail downed?

Marc Hedrick

I think we are very excited about the direction of the discussions and frankly the direction of our Phase II clinical trials in the U.S. And so we've recently had a very revealing discussion with the FDA, I think we have built a strong relationship with them. We have presented to them what we feel like is the ideal approach, should our Phase IIs of support go into the next phase, which we of course hope they will.

There are a couple of different options. One is to go to bigger mortality maybe sorting into trial. And the other one, as Chris mentioned is, to go to a more quality of life composite functional endpoint. They seem open to both. We happen to think that, given our PRECISE data and obviously the way the ATHENA trials have been constructed, there is a tremendous commercial opportunity in that group of patients that have kind of mid-level of heart failure, where they are not an extremist, but they are significantly symptomatic, and that's a population that we've think we can target.

And a quality of life based endpoint plus or minus, a treadmill test or some other measure of exercise capacity, would serve those and we think potentially drive reimbursement and adoption. So I think we're early, so we don't want to get too far ahead ourselves. But I think the first discussions with the FDA are positive. We need to continue to collect the data. We will continue the ongoing discussions with FDA. It's a dialogue, not a single conversation. And update you as we learn more.

Jason Kolbert - Maxim

My last question was, just understanding where you're going with the RECOVER trial? And just help me understand, has that trial begun, how many patients have been enrolled, and is that something that you might consider bringing to Japan sort of the fast track side of the regulations there?

Marc Hedrick

It's important to put RECOVER in context for what it is and what it isn't. It's basically a small exploratory feasibility trial of 10 patients with a pre-negotiated option that's effectively a Phase IIb option to exercise, should we want to. We are at two sites. I think our plan is to enroll that first 10 as soon as we can, evaluate the data, and then make a decision about whether to move forward based on that.

As Chris mentioned, it's going to be very difficult to handicap enrollment. So I think or plan is to let you know, when we get those 10 patients in and then kind of guide towards what our next step might be. The importance beyond just the option, it really does support feasibility in acute muscular tenderness injuries, which have implications throughout orthopedics and sports medicine, and that idea is consistent with what we've seen frankly in our cardiovascular patient.

The heart is a muscle that has tenderness components. We've seen repair in the acute and chronic side in APOLLO and PRECISE trial, and so we think that's supportive data. We've also got sports medicine pilots in Europe and Australia, and we think that the data from the 10 patients will support and align with what we're doing outside of the U.S.

Secondly, I think it's going to support what we're trying to do commercially in Europe, potentially expanding our claims, which could have an important commercial impact in the near-term, given our good relationship with our notified body. And then, finally, and I think less important, but important to mention, is this data could support a future orthopedic sports medicine related IDE in U.S. So I would look at it really with that lens and probably no more.


Our next question comes from the line of Yale Jen with Laidlaw & Company.

Yale Jen - Laidlaw & Company

So I just want to start with BARDA contract. Given that you guys have already spoke with FDA, is there any additional agency you need to speak with? And if everything goes smoothly, if I model that potentially a decision to be maybe in second quarter of this year, will that be something not fetched?

Marc Hedrick

I think a little bit of context. So with respect to BARDA, we have weekly, some times even more often than weekly, twice a week conference calls with BARDA. On a weekly basis, we have non-BARDA related individuals in that call, from other agencies within the government, even outside of HHS and going into DOD and so forth. So there is a recognition beyond just BARDA that Cytori has a BARDA contract that we are moving the process forward and tend to go into a greater stage of our contract.

So at DOD, FDA and a variety of other agencies that sit at the decision making table, we won't be new to them. So when we get to the ultimate decision making forum, they will be very aware of Cytori, our data and then our joint plan at BARDA, and BARDA in a way that's sort of helping to shepherd us through a complex governmental process to try to achieve their own governmental end.

Yale Jen - Laidlaw & Company

So the thing is possibly we'll have possibly a government decision maybe in the first half of this year is a possibility?

Marc Hedrick

Yes, I think that's absolutely a possibility. A lot of flurry of activity in Q2 related to that. And assuming things happen on schedule and there are not delays, which there certainly could be, Q2 answer is very possible.

Yale Jen - Laidlaw & Company

And in terms of ATHENA study that for the first one that you have treated 33 patients, so there is about 12 left to be recruited and treated. And given the timeline you mentioned that the possible completion of recruitment will be second or third quarter of this year, and with that timeline, if I consider already to 2015 you might have the topline data, would that be something of possibility?

Marc Hedrick

Let me just correct one thing that you said, so we're absolutely clear. So we're at 23 not 33. I wish we were at 33, hope to be at 33 soon enough. So we have a little bit more work to do. We're over half way there. Between Chris Calhoun, Steven Kesten and myself, we've been out to every single clinical trial site in ATHENA I and ATHENA II. A lot of enthusiasm out there for getting this trial enrolled. And people can see the finish line.

Of course, the key gating item is when do we finish enrollment, that could be sort of middle of the year, depending on what the enrollment assumptions are that one makes and are there any other issues that occur. So six month data is going to be critical. It will take about eight months after we finalize enrollment to have that data available, the database unlocked and reviewed. So, yes, your timing is about right. It's going to be kind of early next year, before we get the data.

But in the meantime, we're going to continue to drive forward on ATHENA II, enroll those ATHENA I sites directly into ATHENA II. And I think on a practical way that's a way we keep the momentum going. We change the trial, as Chris mentioned. I think that was the tough, but right call. Momentum is building and we hope to get ATHENA I done enroll right into ATHENA II, and then be prepared for the decision discussion about Phase III.

Yale Jen - Laidlaw & Company

And last question before I get back to the queue is that, in terms of China approval process, I guess the guidance is potentially toward fourth quarter, end of this year. And should that be the case, if Lorem has committed additional I guess about $7 million purchase, is that something still whole? And also do you have any comment in terms of the process right now in terms for the FDA approval?

Christopher Calhoun

We've just spent the last couple of weeks with the leadership team from Lorem, who has been over here in the U.S., meeting with cardiac centers and potential several of the board members and other centers that they can learn from. So they're getting that business up and running.

In addition, they did buy the product that was part of the contract in Q4, and that's really to sell into their current market, Singapore and Australia. And they're building up their commercial team to do that. And there's an existing funnel that we already had in place for those markets that they'll be pursing. So we should see some commercial activity generally over the year from the existing markets.

Now, for opening at China, we're making a series of moves that will allow us to bring our device, get it approved into China, we think by the end of the year. Obviously, any time you're dealing with international regulatory authorities, it's hard to give an exact timeline. But we've mapped out a plan and a pathway on how we can get there. And we are pursuing that aggressively together with the team from Lorem.

And upon approval, it's their vision to bring 50 systems into 25 of the top cities within China. And by bring, I mean they want to buy the systems and place them into the hospitals, and then feed those hospitals with 10 or 20 or 30 consumables, so that they can get going.

And then do all of the appropriate training and education to create kind of well prepared centers of excellence to get that clinical experience under their belt that they treat people safely and they are sophisticated, and then they can become training centers to spread it more actively across China. So that's kind of their model.

They are committed to investing and really building that market. And the secret for China, as you probably will know, it's a really a numbers game. And we're talking about from a population base and a need base, really one of the largest opportunities in the planet. And so getting those systems out there, getting the teams trained is their goal, and they don't want any barriers to do that.

So the others are committed order. Once we get approval, I think it's in the $5 million range. And that really is to get these systems and deploy them across targeted cities around China. And then also feed them with a meaningful number of consumables, so that they get trained and that they can treat essentially autonomously without a lot of oversight from the company.

So there is an active plan that's coming together and we're very, very excited about the relationship with Lorem. He finished off the equity investment, as you've seen, and this is the value beyond the equity and relationship, the partnership value. I think what we're going to see from Lorem is going to be important for the company.


Our next question comes from the line of Keay Nakae with Ascendiant Capital.

Keay Nakae - Ascendiant Capital

First question relates to the BARDA contract and your upcoming meeting with the FDA. So in order to be able to move forward into the next phase of BARDA, what specifically do you need the FDA to agree to? Do they actually have to have approve an IDE for your proposed indication for treating thermal burns or what exactly does the FDA have to sign off before you can move forward?

Marc Hedrick

I think the way discussions with BARDA had gone, the key was the three objectives, which we've done. And then subsequently they've asked us to at least have a preliminary discussion with FDA. So the discussion itself becomes the gating item and that meeting is on the schedule.

Keay Nakae - Ascendiant Capital

And then, related to Lorem, what else can you tell us at this point about their infrastructure? What to they physically now have in place to begin selling your product?

Marc Hedrick

The answer is they're beginning to build an infrastructure. So I think as we discussed on the last call there, a new company that has deep connections within the Chinese market, FDA, Medical Device, Big Pharma and so forth, they're very interested in building distribution channel for us throughout China. China is a gigantic market, as you know, difficult and complex. They have the connections to be able to do that.

So I would say, it's still very early and we are just a handful of employees. But over subsequent quarters, I think our plan is to update you and let you know kind of how that's progressing and how that's building. Right now, the key is just move towards regulatory approval, which doesn't require a lot of infrastructure.

Keay Nakae - Ascendiant Capital

Have they shared with you a plan for how they are going to build that out in terms of having an X number of people and having XYZ systems in place by such and such dates, do you have that kind of visibility?

Marc Hedrick

The discussions with Lorem went on for a good year, leading up to the signing of the contract. And during that time, they collectively agreed upon business plan and was produced, but the key gating item is ultimately regulatory approval. It triggers a lot of the subsequent investment and the ultimate commercial work, which is where a lot of the cost will go.

Keay Nakae - Ascendiant Capital

And then, just finally, back to the hamstring study. I know you're going to do the initial 10, but is there at least an idea of how many additional patients you would then look to be enrolling and evaluating?

Marc Hedrick

The RECOVER trial, the FDA has agreed to, has 10 patients in sort of I guess I'll call it an A Phase, which is a feasibility. And if I may speak it's a rule and safety study, a feasibility study. And we look at two doses in five patients. It won't tell us a lot, but it gets to that initial feasibility stage and accomplishes some of the goals, as I mentioned before.

And it's our decision whether to go into Part B, which is a 60 patient double-blind, placebo-controlled, safety feasibility study, looking at low-high dose compared to placebo 20 patients in each trial. So that's been fully vetted and planned out. But we have the option to pursue it, assuming the FDA would agree that we would do so.


I would now like to turn the call back over to Chris, for our e-mail questions.

Christopher Calhoun

Mark, do you have one?

Marc Saad

Yes, we do. We have received an e-mail question that came in. I think probably it's best for Marc Hedrick to answer.

Mark Hedrick

So the question from [ph] military is that, there have been many adipose-derived stem and regenerative cell therapy clinics opening up in the U.S. in the last couple of years, despite the fact they are likely operating in violation of FDA regulations related to the concept of, minimal manipulation. Could you explain how Cytori's technology fit into this regulatory picture? How this may play out? When it might represent an opportunity for the company?

Mark Hedrick

So [ph] Ray, thanks for the question. First let me just mention what Cytori's position in history is over the last 10 years and this comes from an awful lot of back and forth with the agencies. Celution its consumable, Celase, Intravase, the ADRC output, they are all regulated as a device by CBER that came as a result of a lot of discussion and negotiation. Ultimately, with the decision made outside of CBER, CDRH, at the Ombudsman level through a process called request for designation. So we are clearly regulated as a device and the therapy is regulated as of device.

As for other approaches such as cell culture taking adipose tissue from the patient and applying any other clinical manufacturing or manipulating the tissue or cells or whatever, that's really seems to be increasingly directed by FDA and CBER to the BLA or drug biologic path. And so that has a very different timeline and regulatory path and deliver both and so forth than the device path has. So kind of implied in your question, and I can't answer is that we're not really privy to what the FDA's strategy is relative to other companies and how they might employ some sort of enforcement strategy on clinics that might be doing a homebrew sort of thing.

So we don't know. I can tell you that over the last two or three years, I have seen redacted letters to clinicians by the FDA implying as much that they would be regulated under the BLA, and ask as a biologic and if they should submit a biologic application. So when you take all this together, it's self-serving, but I think it validates our path.

And a lot of the hard work that we've been doing with FDA over the last 10 years to get that anchor as a device, not a biologic in contrast to pretty much every other group, where they are biologic, they are some sort of cell culture or something as you mentioned beyond the minimal manipulation. So I think it's a competitive advantage for us. And because of where we are with FDA in some of our trials and so forth, I think our path is clear and it's a relatively direct way to the market.


And at this time, we have no further questions. I'd like to turn the floor back over to Chris Calhoun for any additional or closing remarks.

Christopher Calhoun

Great. Thank you very much. I want to thank everybody for your time, interest and support of Cytori and our important mission to innovate and market Cytori Cell Therapy products that we believe will improve the lives of millions of patients around the world. Thank you very much.


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

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