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Cellular Dynamics International Inc. (NASDAQ:ICEL)

Q1 2014 Earnings Conference Call

May 6, 2014 8:00 AM ET

Executives

David Snyder – CFO

Bob Palay – CEO

Analysts

Tycho Peterson – J.P. Morgan

Shaun Rodriguez – Cowen and Company

Dan Leonard – Leerink Partners LLC

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Cellular Dynamics First Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator instructions)

I would now like to turn the conference to our host, Mr. David Snyder, CFO. Sir, you may begin.

David Snyder

Thank you. Good morning and welcome to the first quarter 2014 conference call for Cellular Dynamics International. My name is David Snyder. I’m the company’s CFO. I’d like to read you our Safe Harbor statement before turning 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-KA, filed with the Securities and Exchange Commission, 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. I’m pleased with the company’s performance in the first quarter. Strategically, we continue on course. As many of you know, CDI’s goal is to become the de facto standard for manufactured human cells and become a dominant player in this rapidly emerging field.

This quarter, we demonstrated good progress towards 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 develops and manufactures human cells to precise specifications in industrial calamities. Our products are based on induced pluripotent stem cell technology, iPSC, originally developed by our Scientific Founder, Jamie Thomson. Having industrialized iPSCs, CDI is unlocking an exciting product – an exciting potential product matrix. Every cell type in the human body by every person on the planet, the opportunity to manufacture this product matrix offers CDI the opportunity to prosper in a close to $10 billion market in 2011, according to the market research firm, Adivo Associates.

There are three components to this market. The first is the $3.5 billion market for the in vitro use of cells in drug discovery, toxicity testing and chemical safety. The second market is the $1.3 billion market for stem cell banking. The third market is the $5 billion market for in vivo cell-based therapeutic research and development.

Our products are designed to penetrate these markets. We have two primary product lines, our iCell product line and our MyCell product line. Our iCell product line currently includes iCell cardiomyocytes, iCell neurons, iCell hepatocytes, iCell endothelial cells and the recently introduced, iCell DopaNeurons. Our iCell products are sold cryopreserved and as a consumable. Freezing the cells allows both us and our customers to inventory our iCell products.

In addition to these five products, we have multiple cell types in various stages of development – iCell hematopoietic progenitor cells, iCell cardiac progenitor cells, iCell astrocytes, iCell nociceptors, iCell, iCell skeletal myoblasts, and additional iCell types we have to discuss. Every one of these products are being developed in conjunction with our customers, some of which result in collaboration revenue to CDI.

Our second product line is MyCell. With MyCell, our customers send us blood – send us a blood sample from one of our [ph] people. We use this blood sample as the starting point for manufacturing their personal iPSC line. Once we have manufactured the iPSC line under our strict industrial control, this line can be used to manufacture any of our iCell product types from that individual.

So to reiterate, our strategy is to continue to launch products and the potential product matrix of any cell from any genetic background. We are targeting our iCell and MyCell products at three target markets – the in vitro cell market, the stem cell banking market and the in vivo cell-based therapeutic research and development market. Our goal is to set the de facto 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 as I do. Is CDI making progress on its long term strategy? Let me walk you through some of the highlights from the first quarter which include a continued rapid revenue growth. Total revenue increased 59% for the trailing 12 months ending in the first quarter of 2014 which were $12.4 million as compared to $7.8 million for the 12 months ending in the first quarter of 2013.

In addition, our sales to large customers increased 70% year-over-year. Our average sales to our top 10 customers for the trailing 12 months ending in the first quarter of 2014 was $875,000, up from an average of $516,000 for the 12 months ending in the first quarter of 2013. In the first quarter, total revenues were $2.9 million, an increase of 23% over the $2.4 million of the same quarter last year.

Our growth in total revenue this quarter was driven by strength in Collaborations, partnerships and other revenue which increased by 132% over the corresponding quarter last year. That growth was driven principally by a large increase in the unit volume of iCell hepatocytes as well as by increases in revenue grant with the Medical College of Wisconsin and to the revenue on our contract with CIRM and the related contract with Coriell.

We believe that this growth validates our view that product diversification helps us overcome some of the inherent volatility associated with orders of cryopreserved human cell products, products that can be inventoried by our customers. During the first quarter, we received $1.1 million from the California Institute of Regenerative Medicine. We recognized $256,000 of that revenue – actually, of that as revenue.

So deferred revenue related to the CIRM contract increased by about $850,000. This is a point worth explaining. The increase in deferred revenue relates to slower than expected rate of sample collection and delivery by the CIRM selected third party academic grant recipients. Very simply, CDI cannot reprogram CIRM tissue samples into iPSC lines until we receive them from the academic sample collectors.

The first samples did not arrive at our new facility in Nevada, California until April this year. Being grants, revenue is recognized as work is completed. So the recognition has been slower than the receipt of funds from CIRM. David will detail this in – we’ll go through this in more detail a little bit later.

Our 25% quarter-over-quarter total revenue growth occurred despite a decline in product revenue due to a quarter-over-quarter decline in unit sales in iCell cardiomyocytes. We believe this lower unit volume reflects the natural volatility in order placement for cryopreserved products that our customers can inventory. This decline was offset in part by the increase in unit volume in iCell hepatocytes which is recognized in Collaborations, partnerships and other.

We remain encouraged about the future growth in product sales. We believe this quarter’s result reinforces the value of our strategy of developing a broad portfolio of differentiated cell types including iCell hepatocytes to meet the broad research and therapeutic goals of our life science customers. And this portfolio continues to grow.

We recognized our first product sales revenues from iCell DopaNeurons during Q1. Dopaminergic neurons are implicated in neurological disorders such as Parkinson’s Disease and Schizophrenia. We believe iCell DopaNeurons provide an exciting new in vitro model to investigate these and other neurological diseases.

We also were pleased with the high level or recognition CDI received at this year’s Society of Toxicology meeting. SOT, we believe, is the major convention for people working in the field of toxicology. CDI was included in eight podium presentations and in 19 posters at this year’s SOT, including a featured symposium talk on the environmental tox applications of iCell and MyCell products by CDI’s founder, Jamie Thomson. We believe this is indicative of our rapid acceptance in the in vitro market.

So in this quarter, we saw a continued penetration of our iCell and MyCell products into the in vitro market. We also saw progress on our contracts with CIRM and Coriell in the stem cell banking market. In addition, we continued our efforts to expand our presence in the stem cell banking market. Along these lines, we increased our business development efforts to sign more banking deals, targeting large government banks like CIRM 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 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 to begin to produce revenue, leading to additional growth.

I will now turn over our call to our Chief Financial Officer, David Snyder, who will discuss our financial performance in more detail.

David Snyder

So once again, good morning. I’m delighted to have the opportunity to share with you the financial results for Cellular Dynamics for our first quarter 2014. As Bob indicated, we are pleased with both our total revenues and our revenue from our top 10 accounts continues to grow. And we are particularly pleased with the growth in our revenue from Collaborations, partnerships and other revenues. I believe you’ll find in the financial data affirmation of our strategy and reasons for optimism going forward. So let’s dig in.

Turning first to our balance sheets. Obviously, our cash balance continues to dominate any other account on the balance sheet. We do believe that our balance of $53.7 million provides a strong cash balance for the ongoing pursuit of our strategy. Last quarter, I called to your attention our growing inventory balance reflecting our position activities in anticipation of forward sales. That trend continued during the first quarter.

The growth in inventory reflects the acquisition of raw materials in anticipation of 2014 demand and the net increase in finished goods inventory driven particularly by stocks of our newly released product line, iCell DopaNeurons. Last quarter, I also noted the large increase in accounts receivable. Perhaps not surprisingly, that balance declined during Q1 as many of those receivables were collected. Similarly, last quarter we noted a large increase in accounts payable and accrued liabilities. And also not surprisingly, many of those obligations were paid during the quarter.

The other notable change in our balance sheet we alluded to last quarter and that was our anticipated increase in deferred revenue. At March 31, 2014, our deferred revenue balance increased from the year end by a net of $847,000 to a total of $2.3 million. This increase principally arose from our contracts from CIRM and Coriell as well as certain MyCell contracts, net of recognized revenue on these and other agreements.

I’d like now to walk through the statement of operations in some detail. Turning to the statement itself and working top down, let’s first examine revenue. Revenue grew 23% for the quarter from $2.4 million to $2.9 million. The total number of customers sold to in the trailing 12 months is up from 130 at March 31, 2013 to 159 at March 31, 2014. And the trailing 12 months average revenue from our 10 customers, which we continue to believe is one of the most important metrics of our progress, has increased from $516,000 for the 12 months ended March 31, 2013 to $875,000 for the 12 months ended March 31, 2014.

Addressing now each component of revenue, our revenue from product sales declined from $1.8 million for the three months ended March 31, 2013 to $1.5 million for the three months ended March 31, 2014. The decrease in product sales is primarily attributable to a decrease in unit volume sales of our iCell cardiomyocytes. And Bob has previously provided color on this change.

Revenue from Collaborations, partnerships and other revenues grew over the quarter, primarily driven by a large increase in the unit volume of iCell hepatocytes as well as by increase in revenue on our grant with the Medical College of Wisconsin and on our contracts with CIRM and Coriell.

Let me just here to remind everyone of some important accounting details. We have very specific criteria for captioning our sales of differentiated cell types as either products sales or Collaborations, partnership and other revenues. As we say in our 10-Q, in order to be classified as a product sale, a given product must have, open quote, "a well defined manufacturing and quality control protocol", close quote.

This is so we can accurately accumulate cost in inventory and then expense those cost in cost of product sales. While demand for our iCell hepatocytes is growing, we continue to regard their manufacture as a process under development. Hence, the cost to manufacture iCell hepatocytes are captioned in research and development expense and the revenue from the sales of iCell hepatocytes is captured in Collaborations, partnerships and other revenues.

Having announced all of that, collaboration, partnerships and other revenues for the quarter were also driven by grant type revenue and in particular, revenue from our contracts with CIRM and Coriell. As foreshadowed last quarter, revenue on these contracts is growing. During the three months ended March 31, 2014, we recognized $256,000 on the CIRM contract and $75,000 on the Coriell subcontract. Deferred revenue on these two contracts increased from year end by $937,000 to a balance of $1.9 million at the end of this quarter.

As a reminder, we recognize revenue on our CIRM and Coriell contracts using the proportional performance method. This is analogous to the percentage completion method which many of you may be more familiar. In order for us to recognize revenue, we need to generate activity and incur costs. As Bob indicated earlier, sample receipt has been slower than CIRM expected and so we’ve not had the opportunity to perform work. In response, we have carefully managed our cost and expenses. The good news is that we have carefully controlled expenses while we remain confident that the samples will arrive, that the work will be performed and that the revenue will be recognized.

Looking now to cost of product sales, as we indicated in our public filings, we believe the difference between product sales and cost of product sales is an important measure 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 revenues are reported as research and development expenses. So we believe the comparison of total revenue to product cost of sales is likely not a helpful metric.

For the first quarter, our percentage gross margin from product sales was 69% which compares favorably to our gross margin from product sales for the first quarter of last year’s 67%. The 69% gross margin on product sales in the current quarter reflects reductions in royalty cost partly offset by cost associated with MyCell product revenue. Additionally, gross margin product sales also benefited from an increase in average sales price.

Gross margin for the first quarter of 2014 was slightly less than that achieved in the fourth quarter of 2013. As we have emphasized in earlier calls, margins have varied and we believe will continue to vary due to changes in product mix, changes in average sales price and the introduction of new iCell products which may have caused characteristics to differ from our existing products. We believe in particular that our Q1 margins were affected by both the mix effects of lower iCell cardiomyocyte sales and by the lower margins of certain new products.

Continuing down the expense captions, I’ll note that research and development expenses for the three months ended March 31, 2014 grew $1 million from $3.9 million to $4.9 million. This increase is attributable to the cost of delivering collaboration, partnerships and other revenues, namely as discussed at length, iCell hepatocytes and the CIRM and Coriell contracts.

Most of the headcount in our research and development organization has been in support of our new California operation. Going forward, we do not expect to materially grow R&D cost, attributable to new product development. However, R&D cost in the aggregate will continue to increase in future quarters as we perform on the CIRM and Coriell contracts and deliver additional collaboration, partnerships and other revenues.

Next turning to sales and marketing. Like last quarter, not much to report here. We grew headcount over the past year from 26 to 31 to support ongoing growth and to expand both sales and marketing activities. In the quarter, we hired a new VP for international business development and look forward to continued growth throughout the world.

Lastly, we turn to general and administrative expenses. Quarterly, general and administrative expenses did increase from $2.1 million for the three months ended March 31, 2013 to $3.5 million for the three months ended March 31, 2014. For reasons I discussed last quarter, I believe that this increase is more appropriately compared to the $3.1 million incurred in the fourth quarter of last year. We believe that this quarter’s expense and that of the fourth quarter of last year are reasonably indicative of our ongoing general and administrative expenses throughout the remainder of this year.

Most of the increase in general and administrative expense can be attributed to increases in compensation and non-cash compensation incurred as of and since the IPO as well as to the cost attributable to our status as a public company. I’ll simply note in passing that our future quarter-over-quarter comparisons will continue to show a similar result until at least the third quarter of this year when we will be making comparison to a historical period that is subsequent to our IPO.

Obviously, by that same reasoning, the trailing 12 months comparisons provided in our public filings won’t be completely free of this challenge until June 30, 2015 when as a subsequent matter, both12-month periods will be subsequent to the IPO. And this concludes my comments.

Bob Palay

Thank you, David. To summarize, CDI experienced rapid over 59% revenue growth during the trailing 12 months ending with Q1 2014. Growth during the quarter was fueled by growth in iCell hepatocyte human cells. The gross margin on product revenue continued to be a healthy 69%. The CIRM contract continued to generate cash.

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 market. We are a leader in a new and rapidly evolving industry. 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 towards our goal by setting the industry standard for manufactured human cells. As I mentioned at the beginning, strategically, CDI continues on course and I continue to be confident in our future.

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

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from Tycho Peterson of J.P. Morgan. Please go ahead.

Tycho Peterson – J.P. Morgan

Hey, guys. Bob, I’m wondering if you can just talk to the cardiomyocyte, its short form, and was this with a particular customer. And the whole context of kind of inventory levels with your customers, I’m wondering if you could just get us a little bit more comfortable with the inventory workdown dynamic I guess.

Bob Palay

Yes. Because our product is cryopreserved, we’re, at this point, learning about what you call the inventory workdown dynamic, Tycho. And we believe what happened is the following. People purchase large amounts at your end and didn’t repurchase during this quarter – during the last quarter. But we expect them to be purchasing in the coming quarter.

Tycho Peterson – J.P. Morgan

Okay, but this was credit across a fairly broad range of customers, not just a couple?

Bob Palay

Yes. I mean we had a few large purchases at the end of last – in Q1 of last year by some customers but that didn’t happen again in Q1 of this year. But those customers continue to order, Tycho, so this – we’ve been saying all along that quarter to quarter, it’s hard to follow us, to understand what’s going to happen on a quarterly basis. That’s why I always talk in the – as much as I can about trailing 12 months or longer time periods because literally, a couple $250,000 cardiomyocyte orders slipping from one quarter to the next changes our numbers.

Tycho Peterson – J.P. Morgan

Then you talked about kind of the magnitude of your pharma contracts increasing on a year -over-year basis. Can you talk to maybe the breadth of the products that are being – projects that are being done in terms of moving beyond kind of core ADME [ph] tox?

Bob Palay

Yes. We’re seeing much more discovery work. And I think when you look at what’s happening with our iCell hepatocytes, that’s really exciting because our iCell hepatocytes are virally infectable. Literally, you can take a serum from hepatitis B patients or hepatitis C patients and put them on our iCell hepatocytes and the entire viral lifecycle replicates in our iCell hepatocytes and we’re unaware of any other liver model system – cell model system where that occurs. So that in particular we’re seeing strong interest in – beyond ADME [ph] tox.

And then of course, the whole dopaminergic neuron product that we just launched is completely designed – is not a tox product, it is a discovery product. And what it does is it allows you to look at the neurons that are most implicated in Parkinson’s and schizophrenia. And literally, there is no other human way to get these.

So we’re – as you see, our new products rolling out. The cardiac product is – have tox and discovery applications. The hepatocyte product has tox and discovery applications. We’ve seen a lot of uptake on the discovery side. But dopaminergic neuron and the other products in our pipeline are much more discovery-oriented.

Tycho Peterson – J.P. Morgan

Okay. Two other quick ones and then I’ll hop off. Anything new on the HLA banking front and then any thoughts on FDA guidelines around stem cell?

Bob Palay

Yes. Let’s start with – repeat your first question because we’ll do the –

Tycho Peterson – J.P. Morgan

On banking.

Bob Palay

I would start on HLA banking, yes. We actually have received a sample for our in house HLA bank. We plan to build out five. We’re building out a bank initially of five individuals that are HLA matched, HLA homozygotes, and we’re making them GMP.

So we’re starting on that. There’s still a lot of discussion in the industry both at the NIH, at the California Institute of Regenerative Medicine and in Japan about building these HLA banks. And we want to be moving in the forefront of this. So we’re building our own. We’re starting with five individuals.

And we believe that they’re designed to match the North American population. And we think that – our estimate is somewhere between 15% and 20% of the US population is picked up by our samples.

Tycho Peterson – J.P. Morgan

And then the FDA guidelines for stem cells [indiscernible]?

Bob Palay

Yes, I think there’s two different – I’m not sure. There’s two different ways of thinking about that. For the in vitro market, we’re seeing continued interest by the FDA particularly led by Norman Stockbridge to use iPS derived cardiomyocytes in replacement of the thorough QT study currently done to look for a cardiac arrhythmia.

The thorough QT study is a clinical study and Norman Stockbridge is leading an effort that we hope will result in that test being replaced by iPS derived human cardiomyocytes to predict this problem.

He mentioned in a recent statement that his deadline or his target date is middle of next year. I’ll let you all decide whether the Federal Government meets their target dates or not. But this is what he is pushing the industry to do. Were you talking about that or the therapeutic use of iPS?

Tycho Peterson – J.P. Morgan

No, no. That’s what I was talking about.

Bob Palay

Okay.

Tycho Peterson – J.P. Morgan

So that’s great. Thank you.

Operator

Our next question comes from Shaun Rodriguez of Cowen and Company. Please go ahead.

Shaun Rodriguez – Cowen and Company

Hi guys, good morning. Thanks for taking the questions. My first one is somewhat related to Tycho’s on breadth of applications that you’re seeing. You’ve talked about the selling process at length from the past within these big organizations where the groups working on different disease areas can be pretty segregated from one another.

But just, I would be curious to hear about transits [ph] where you’re seeing signs that you’re more able to leverage the initial adapters in one area and get them obviously to vouch for you or you can build on those relationships as the menu continues to grow into other areas.

Bob Palay

Yes, I mean at this point in many of the major pharma, we’re established as having a high quality product. And that was established often on our cardiomyocyte product in the tox area. But even though these groups are segregated, they do talk to each other. And what happens is the tox group and then use of the stem cell – they usually have stem cells groups, groups that are looking at the use of stem cells in discovery. And those two groups start advocating to the rest of the organization the benefit of the model.

And we’re in multiples pharmas like that. And probably the strongest example of that is Eli Lilly where if you look at our revenues last year, they exceeded the size of the Center of Excellence contracts. So that’s the sign that what’s happening is, there’s sort of this initial demand. But then as everybody understands, the power of our product starts moving into the various discovery units.

And the other thing that happens at some pharmas, they might close one discovery unit, but the person from that discovery unit switches to another. And in the instances where this has happened with some of our biggest advocates at large pharma where they moved to a department and therefore they literally switched our cell type that we go with them.

In one example there, one person moved from cardiac to neuro degenerative disease. And he just switched products with us. Does that –

Shaun Rodriguez – Cowen and Company

Yes, no, that’s very helpful. It’s helpful. It is, thank you for that. And next on pricing. I think you noted in the 10-Q that ICEL pricing was up. I want to say high single digit percentage. But just was curious if this is something sustainable or more a function of the lumpiness and mix of products and our customers that we saw in the quarter.

Bob Palay

Yes. David, you can correct me on this if you see it differently. But what we understand that happens is we do volume pricing. So a lot of it has to do – if you’re a large volume customer, you get a lower price. If you’re a smaller volume customer, you get a bigger price. So t really is a function of mix, both product mix and customer mix that leads to that. David, do you like –

David Snyder

Yes, no, that’s exactly right. And yes, so I wouldn’t draw too many conclusions about any given product line’s pricing from that overall assessment of where the products are going.

Bob Palay

But remember, cardiomyocytes is our highest gross margin product historically. And therefore, we maintained a high margin in this quarter even though unit volume amount was lower than the year prior.

Shaun Rodriguez – Cowen and Company

Yes, understood. And then the last for me, I was hoping you could speak to the opportunity from some of the non-biopharma interests you’ve talked about in recent quarters.

You announced a deal with Nestle at the beginning of the year or so. I would appreciate specifically an update on where they are in their process towards becoming hopefully a more significant utilizer, but then also maybe a broader update on the business development front in terms of the interest you noted from outside of the biopharma industry. Thank you.

Bob Palay

Okay. I think there’s three parts to that question that I’d like to address. On the in vitro side, you’re talking about outside of biopharma. Nestle continues to purchase from us, though we don’t disclose how much. But they’re a significant customer of ours. And we are – we continue our business development effort with other food companies and cosmetic companies.

In addition, we’re seeing uptake that’s in the biopharmaceutical area but not in the discovery area. Our iCell neurons are actually used – are being tested right now to be a replacement assay for quality assurance and quality control in biologics manufacturing, okay, specifically for botulinum toxin.

So that is a part of our business that is growing very nicely. So we’re seeing two what I would call out of what we – we initially built our thoughts on the in vitro business around biopharma. But here’s two big customers that are coming that are not in that. In addition, we’re focusing a lot of business development effort right now and expanding our stem cell banking business particularly towards the commercial side of stem cell banking which currently is represented by cord blood banking firms.

And we’re very active around cell therapeutics. We think the value proposition we have there is very strong. If you look around the cell therapy area, you’ll see that many of those companies trying to do cell therapies today have significant manufacturing hurdles. And we believe that we have the solution to that hurdle and we expect that kind of revenue to come online.

I hate to predict the exact timing of that but I’ve been saying I’ll be extremely disappointed if we don’t have deals in place in the next couple of years. We’re getting a lot of interest, both U.S. and foreign around this. So is that helpful, Shaun?

Shaun Rodriguez – Cowen and Company

Very helpful. Thank you, guys.

Bob Palay

Okay. Shaun, I just – I read Doug’s comment that came out this morning and we agree. It’s hard to predict our quarters. He used a more colorful word though, so. Also, I want to point out that the analysts work awfully late at night. I’m seeing stuff coming out at midnight, 2 in the morning, so you guys must never sleep.

Operator

(Operator instructions) And our next question comes from Dan Leonard of Leerink. Please go ahead.

Dan Leonard – Leerink Partners LLC

Thanks. Hey, Bob, don’t feel too bad for some of that distribution evaluated.

Bob Palay

Oh, you shouldn’t have told me that. You shouldn’t have told me that. I’m feeling – David and I were wondering how you put out things at 3 in the morning and then get up for these calls.

Dan Leonard – Leerink Partners LLC

Well, I guess it’s nice to create the perception.

Bob Palay

Yes, that’s great.

Dan Leonard – Leerink Partners LLC

[Indiscernible] put them in that oil [ph]. Bob –

Bob Palay

24/7 on the analysts, right?

Dan Leonard – Leerink Partners LLC

So my first question, you touched on this a little bit but I was hoping you can maybe elaborate on your efforts. You mentioned you’re increasing your business development upwards in stem cell banking. Is there any more color you could offer on what the pipeline looks like or maybe what you’ve actually done to increase efforts, does this thing increase headcount or other more erections or just more color?

Bob Palay

It’s a high level of interaction. And particularly talking to cord blood banking firms on the stem cell banking side. And there’s lots of cord blood banking firms around the world, but there are not as – but the leaders in that area are a smaller number. And we’re talking to the largest ones in the major regions basically. Nothing to disclose now, but we have an active effort going on there.

And then we also have – David was pointing out – we’ve actually been approached actually by groups that do concierge medicine around this.

The other thing that we’re doing is we’re also on the stem cell banking side. We believe that there may be a very large or some large banks built around this HLA banking concept. And we’re actively engaging in the HLA banking community around that.

And again, that’s a really focused effort. There’s dozens of thought leaders that we are interacting with. And the question there is not really I think that the HLA banks will get built, but when and how they’ll be funded.

So that’s the focus of our – so it doesn’t require hundreds of people, Dan. It requires a focused effort by a handful of people on our side, on our team that have integrated ourselves into those two communities.

Dan Leonard – Leerink Partners LLC

Got it. Thank you. That’s helpful. And then Bob, I know it’s early, but can you perhaps offer some perspective on the acquisition of Hyperion last week. Does that meaningfully – is it too early to tell or has it impacted your interactions with customers around using your products for discovery work?

Bob Palay

I actually talked to Chris Parker, our Chief Commercial Officer about that yesterday, and it’s clearly impacting our interactions. So let me talk about that Hyperion deal and what we’ve been able to ascertain. And remember, I don’t sit on their board of directors or anything, but Hyperion was founded as a company to do drug discovery based on the iPS platform and basically, the screen on it.

And they focused early on on creating sort of neural progenitor type cells from iPS and they got samples from multiple Alzheimer’s patients. And what they found pretty early on in their screening that they’re in the serum, not in the cells themselves, but in the serum there was that how [ph] component in that serum that was unusual in the people with Alzheimer’s.

And so they took that. They decided that that would make an effect to the targets they screened against. They found an antibody early on. And they’ve developed that antibody through animal models.

So basically, a pretty straightforward, simple screen, not a complex screen, one just looking for the serum, not looking at the cells themselves came up a with a difference that led to antibody which when put in animal models seem to show effects on the animal models for Alzheimer’s.

BMS wrote a big check. They wrote a $175 million for just this compound. They didn’t buy the screening capability. For just the compound, and that there’s I think $550 million of milestones that are upside to that deal.

I think that speaks to the value of screening on our platform. Literally one of the simplest screens comes up with a $175 million upfront product type. And we’re seeing evidence that not only has the industry shown interest in it, but I think it also speaks to our valuation in that we could potentially be undervalued, because we have multiple cell types, and because of the quality of our cell types, you can do deep screening both in the serum and in the cells themselves. So the classic type of high throughput screening.

So we see this as a nice, what I would call, proof of concept. Everybody’s been asking me, when is there going to be proof of concept for that you can discover drugs on the iPS platform. And here’s a very powerful proof of concept that pharma paid very highly for. And so I’m very excited. I sent Nancy Stagliano, the CEO, a congratulations note. I’ve always told them, we were rooting for them to be successful because their success and our success were intertwined.

And so as you can hear from my voice and if you saw my smiling face, you’d see this was from our perspective, very good news.

Dan Leonard – Leerink Partners LLC

Yes, that’s helpful perspective. And then my final question, is there anything or was there anything noteworthy out of Japan in the quarter? Some of the other companies have been talking about business being pulled forward into the March quarter from Japan in advance of the attack [ph] change.

Bob Palay

Yes. I don’t know if we’re seeing March or I don’t know if we’re seeing that, okay? That I can’t answer. But there is a regulatory change that have occurred in Japan that plays very much to our favor.

And that is in Japan, they’ve shortened and simplified the process of putting iPSC lines, iPSC derived cells as a therapy into the clinic. They’ve shortened the path. There’s a lot of government pressure for progress in this area.

So we’ve seen a lot of activity from Japanese companies visiting with us about this general area. And though I don’t have anything to report, they have reported back to us that they feel that we’re significantly ahead in the manufacture of human cells and that would lead them to think favorably about us.

Dan Leonard – Leerink Partners LLC

Got it. Thank you.

Bob Palay

Other questions?

Operator

I’m seeing no further questions at this time.

Bob Palay

Well, thank you very much for joining us today. And as I said, there’s still a big smile on my face and we remain very confident about the future opportunities for Cellular Dynamics. Thank you very much for joining us.

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.

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Source: Cellular Dynamics International's (ICEL) CEO Bob Palay on Q1 2014 Results - Earnings Call Transcript
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