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Executives

James Bianco – Chief Executive Officer

Craig Philips – President

Louis Bianco – Chief Financial Officer

Analysts

Vernon Bernardino – Rodman & Renshaw

Leah Hartman – CRT Capital Group

Cell Therapeutics, Inc. (CTIC) Q2 2008 Earnings Call August 18, 2008 8:30 AM ET

Operator

Welcome to the 2008 Second Quarter financial results conference call. (Operator Instructions) I will now hand the conference over to Dr. James Bianco.

James Bianco

Before we get started I’d like to remind you as is common with presentations of this type we will be making forward looking statements and as such we recommend that you refer to our SEC filings for more information on the risks and benefits of our programs. Let me also remind you that this call will be recorded and will be available for playback on our website. Any unauthorized recording of this call or use of this recording is prohibited without written consent from the company.

I will briefly overview the progress on some of our strategic initiatives, briefly overview our financials and then turn the call over to Craig Philips our President. We also have available for Q&A section this morning or CFO and our Chief Medical Officer.

Let me begin by discussing a series of recent transactions all of which again have been aimed at simplifying our capital structure and cleaning up our balance sheet. You may recall since December 2007 we have now retired approximately $33 million in exchange $23.3 million of our 2008 comparable debt due in 2011. The next maturity on any of our convertible notes does not occur until Q3 2010 and we feel that that gives us plenty of runway to achieve our goal of trying to break even in 2009.

In addition we have reduced our outstanding preferred stock to approximately $13.1 million of par value remaining, about half of those holders expressing interest in a voluntary conversion to underlying common. As such, we have made significant progress on cleaning up the balance sheet, streamlining our capital structure while continuing to access cash needed for operations during something I’m sure you’re all familiar, a very difficult market in general.

We’ve done that through the issuance of additional convertible debt security as well as an equity line of credit using a warrant to purchase common stock through multiple ongoing closings. Even with the $12 million equity line and the upcoming $22.5 million investment from a single institutional investor we announced last month we obviously will need to raise additional capital in the near future.

We’ve been trying to limit dilution by raising enough cash to get us through each quarter that allow us to get closer to some key pivotal regulatory and clinical milestones where we anticipate the stock price would be more favorable than at present.

That noted let me briefly review our Q2 and year to date financial we reported in our press release this morning. Let me start by noting that while cash flows used in operations for the six month period total approximately $48 million that number included several one time exceptional expenses including as you’ll recall the $2 million for the Zevalin Fit Agreement with Bayer Schering Pharmaceuticals, about $0.5 million milestone payment to PG-TXL for successfully submitting our OPAXIO MAA to the EMEA.

Approximately $2 million in legal expenses associated with certain litigation related expenses and with the establishment of various operating agreements for Nuco. We expect most of the legal expenses relating to the establishment of Nuco to be reimbursed in the event when Nuco is funded. We also had an additional one time operating expense of approximately $750,000 related to strategic financial advisory services. Once you account for the non-recurring expenses our operating burn rate is approximately $7 million a month and will continue to come down throughout the remainder of the year.

Briefly, we have made excellent progress on our spin-off initiative. We expect to be able to announce the independent funding of Nuco which we call it currently within this quarter and once spun out the operational liabilities of our Bresso and our Assistants Medical Facility and personnel’s really become that of the core process in founding for the new company for Nuco. That obviously takes CTI’s headcount down significantly.

This will be the final step in our strategic goal of transforming the company into a commercial stage operation with several eight stage product approvals under regulatory review. Also central to our goal of reducing our 2009 run rate to a goal of approximately $4 to $4.5 million a month prior to any growth in Zevalin sales or from potential success milestones that may be earned from Novartis.

From 2009 we want to be in a position to see regulatory approval for Zevalin in the front line consolidation. The significant growth in sales and revenues now that the reimbursement and in 2009 the administration hurdles will be removed and the product adoption starts to spread to community and college aesthetics.

We also hope to see approval of OPAXIO in the EU as a single agent for non-small cell lung cancer patients who have poor performance status and its launch by our partner Novartis. Lastly, we’d like to be in a position for a third regulatory approval and launch specifically for Pixantrone in a relapse a few speed cells lymphoma setting following successful pivotal trial results which we will report later this year.

If we’re able to realize these potential approvals they could provide the company several shots at breaking even in 2009 and turning profitable in 2010. In addition, we’re hoping to advance OPAXIO towards US approval in 2010 if the interim results in late 2009 are successful and management allowing us to move [inaudible]. Certainly if we’re able to execute on this plan this would be a very exciting turn around from where the company was positioned in 2005.

At this point I’m going to turn the call over to Craig and allow him to update you on our commercial and development efforts.

Craig Philips

I’m pleased to be speaking with you today in my new role as President of CTI because as Jim described the company has several near term potential milestones that could further drive the transformation of CTI into a commercial biopharmaceutical organization.

First let’s discuss Zevalin, as most of you are aware I was formerly leading the US Oncology Business of Bayer overseeing sales of $350 million. I believe that Zevalin in the US has significant unrealized potential based on my review of the clinical data and our potential to expand the label to first line consolidation therapy.

We were pleased that Q2 sales of Zevalin were in line with Q2 2007 sales given the concerns that existed over reimbursement which has since been alleviated with the legislation that was passed in June extending 2007 reimbursement levels for another 18 months. This and past quarterly sales trends indicate that we’re on track to realize net sales of $15 million in 2008. In fact, our July sales numbers were the best year over year yet and are pleased that the benefits of this therapy are being recognized by physicians and their patients.

Finally, in respect to a potential label expansion we’ll be meeting with the FDA next month to discuss the filing of an SBOA based on Bayer’s First Line Indolin trial data. We continue to move towards reporting Pixantrone’s pivotal trial results later this year that if positive could result in filing an NDA in early 2009. Just as a reminder Novartis has the option to negotiate with us for an exclusive license to Pixantrone which if exercised could provide a $7.5 million license fee up to $104 million in registration and sales milestones and very attractive royalties as well as reimbursement of certain expenses.

Obviously we look forward to expanding our relationship with Novartis which currently includes the potential development and commercialization of OPAXIO to include Pixantrone if they choose to exercise their option and if we could agree on the final contract terms.

Lastly, in terms of the product pipeline, we continue to work with the EMEA to move our OPAXIO application forward and believe that this product does offer significant patient benefits including the need for less supportive care such as fewer red blood cell transfusions, hemopoietic growth factors and opioid analgesics compared with conventional chemo therapy.

We’re also encouraged by the progress made by the gynecologic oncology group toward expanding and enrollment in our front line maintenance ovarian cancer trial. We believe, based on the current number of progression that there will be an adequate number of events around this time next year so we would be in a position to conduct an interim analysis and if positive be in a position to submit a USNDA in 2010.

Before opening the call to questions let me briefly comment on another first in class oncology drug candidate advancing into late state clinical testing, that’s CTI’s DNA Minor Groove Finding Agent Brostallicin. As we recently reported, the European organization for the research and treatment of cancer the EORTC recently completed enrollment in a randomized front line trial in the treatment of soft tissue sarcoma comparing Brostallicin to the current standard of care Doxorubicin.

This study was initiated by the EORTC based on encouraging progression free survival rate observed in their prior phase two trial of Brostallicin in the relapse sarcoma setting. In addition, we’re seeing very encouraging results for Brostallicin when used in combination with Avastin. We anticipate being in a position to design and implement a pivotal registration directed program for Brostallicin in 2009.

At this point I would like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Vernon Bernardino – Rodman & Renshaw.

Vernon Bernardino – Rodman & Renshaw

I’m wondering if you could go over what factors drove sales of Zevalin in second quarter that were later than sales in the first quarter?

James Bianco

What factors drove sales?

Vernon Bernardino – Rodman & Renshaw

Yes, such that they were lighter than the recorded net sales in the first quarter.

James Bianco

Sales in Q2 were less than sales in Q1 but sales in Q2 were comparable to sales in Q2 period they were pretty comparable year over year so if you looked at, for example, 2007 if you look at Biogen Idec their Q2 sales were lighter than their Q1 sales, their Q3 sales were higher than their Q2 sales and Q4 sales were higher than the Q3. That may just have to do with seasonality and whatever variances, it’s not like it was growing quarter over quarter for the prior history.

The important point that Craig noted on the call was that coming into June if you’re a hospital or if you’re an oncology practice you’re not going to take the chance on the $22,000 regiment not knowing if a week later it’s going to be reimbursable. We were all concerned that Q2 was going to be really soft when in fact we were pretty pleased that attract pretty much 2007 rates despite the reimbursement hurdles then as you heard really rebounded quite nicely in July and continuing on that trend in August.

We have the issue of reimbursement behind us which was a big win for this product for patients and for the company giving us an 18 month period where in the hospital outpatient setting that reimbursement rate now is whatever their cost and charge ratio is per hospital so their not going to lose money on it and the integrated oncology practice setting it’s 95% of AWT so they will make money on it.

I think importantly we have heard that we’ve seen the proposed ruling from CMS that they have agreed to in the hospital outpatient setting to consider an ASP methodology for reimbursement and if we’re successful getting that which we are confident that CMS will in fact adopt a ruling so that in 2010 after this 18 month period of legislation expires that in the hospital outpatient setting Zevalin will be reimbursed just like Rituximab.

Getting that barrier and that complication of reimbursement removed we think will have a very important impact on sales especially if we’re successful in getting the front line consolidation right.

Vernon Bernardino – Rodman & Renshaw

What I was getting at whether seasonality or driven by concerns regarding reimbursement.

James Bianco

It looks like we were probably within 10% of seven numbers. It looks like there is a little bit of concern on the reimbursement side but its seasonality.

Vernon Bernardino – Rodman & Renshaw

Is there any reason why CMS would not make the rule final before the 18 months expire?

James Bianco

They can’t by law because when congress enacts legislation that is the law for that period of time and then CMS has to follow that law. It’s not a ruling, it’s written into law. That actually provides us a very nice window within which we can work both with CMS on getting an ASP methodology place, remember this product has never been tracked or recorded for average sales price that will require us an our channel partners potentially to have contractual arrangements where we can in fact assure CMS of what the final cost out to the end user is so that ASP methodology can be accurate.

Even more importantly as you know, we have a plan to work with the FDA on removing the requirement for the Bio-distribution dose which will essentially just make it a therapeutic regiment where you don’t have a two part, you don’t have nucleo-medicine scan and so that 2009 if we’re successful in getting that label amended at a time when this drug is now becoming potentially utilizable in a front line indication to be the physician and to the patient does ease and the reimbursement economics will be superior to what they’ve ever been in the past five years since this product has been launched.

Vernon Bernardino – Rodman & Renshaw

What activities do you anticipate participating in or pursuing with the agency by yourself or with Glaxco before the 18 months is over?

James Bianco

With regards to CMS?

Vernon Bernardino – Rodman & Renshaw

Yes.

James Bianco

We are presenting at the APC panel meeting this month. Supportive of the ASP methodology that has been proposed we have worked closely with Glaxco on the ASP methods as well because clearly this will benefit both Pixan and Zevalin in terms of reimbursement ease and correct reimbursement for the two products. I think that that’s pretty much it. CMS will have their final rule typically out in November that rule then becomes institutable once the law has expired.

Operator

Your next question comes from Leah Hartman – CRT Capital Group.

Leah Hartman – CRT Capital Group

I would like to spend a little bit of time of the Novartis relationship. I believe some time ago you made the comment that they were working with you as you prepared your filings both for OPAXIO are they also helpful in Pixantrone although we haven’t had much activity there yet?

James Bianco

Certainly on the manufacturing front so anything that relates to product supply and quality assurance their group in Basal have pretty much weekly and then on a senior level monthly and quarterly updates. With respect to regulatory submissions, conversations with the FDA they’ve been more passive in that clearly they don’t have any contractual rights other than the option to negotiate the license.

They’re a little bit more hands off on that front we’ve done that more as a courtesy as part of the spirit of the relationship for OPAXIO to make sure that if we’re going down a route with a third party vendor for manufacturing or for quality that they’re in that loop since that’s obviously for a big pharma that is a cause for concern if it’s done incorrectly. That’s been the extent of the Pixantrone dialog.

Leah Hartman – CRT Capital Group

With respect to triggering dates on OPAXIO, do we have an accepted application to the EMEA or just the filing?

James Bianco

They have accepted and they have filed the application.

Leah Hartman – CRT Capital Group

When is that expected usually those run about 210 days when do you think you will have a response for approval or non-approval?

James Bianco

Our guidance was that the average was going to be 15 to 18 months from the time of submission. We have provided for guidance was we successfully submitted and was filed in March and April was when they filed it for 2008. Anywhere between July and October 2009 would be a review and feedback date.

We have had preliminary guidance from the EMEA that the rappateurs with respect to the application we have a meeting set up to meet with them to go through the next steps in the fall and then we resubmit what they request for from the various components of the application, we resubmit the data then they go back and go through another three month review cycle, etc.

We’re pretty much tracking on their calendar the way we anticipated it would be and look forward to successfully defending the application.

Leah Hartman – CRT Capital Group

What is the triggering timeframe once you have a decision from the EMEA regarding approval what’s the timeframe then for Novartis to decide?

James Bianco

They have an obligation upon regulatory approval in any territory to initiate development and commercial op activities. There is no 30 day or 60 day, it’s not an option for them under the license agreement. In the event they don’t institute commercial and development activities then the license would terminate.

Leah Hartman – CRT Capital Group

Focusing on OPAXIO or XYOTAX, where are you in the gender base lung cancer trial in the US?

James Bianco

After consultation with Novartis we are in the cost containment mode. We all agree that the first shot on goal is the turn hit you have with the EMEA, regulatory approval in 2009 then everybody would be more than delighted to spend the $40 million plus to get that trial done. Otherwise what we’ve done is we have about 40 centers in the US that are screening patients. It’s just US only and it’s most of those sights that had a significant research interest in the role of estrogen in non-small cell lung cancer and the potential to exploit that.

That’s been trickling along, we’re not pouring a lot of resources or cash into that that was a joint committee decision between us and Novartis.

Leah Hartman – CRT Capital Group

Any development principally happening in OPAXIO is investigator led like the OCOG ovarian studies.

James Bianco

The GOG, the GVI oncology trial which is investigator led as you know that’s under spot under their I&D and we have an agreement with the FDA what’s the interim and what the primary analysis would look like for that trial.

Leah Hartman – CRT Capital Group

Turning to the Pixantrone development are you expecting top line data by the end of the year?

James Bianco

Yes, top line data would be set in the fourth quarter.

Leah Hartman – CRT Capital Group

That triggers what from Novartis?

James Bianco

I think they have a 30 day period to either opt in or not.

Leah Hartman – CRT Capital Group

Turning to your balance, your cap table could you walk me through the pieces of convertible debt presently outstanding? I think there’s been some change from the end of the March quarter to the end of June to get me to $161 million and then you’ve done an exchange of 13.5% into 18.33%, can you walk me through hopefully what it looks like today?

James Bianco

Today meaning probably two to three weeks ago right?

Leah Hartman – CRT Capital Group

Post the exchanges if we can, through July 25.

James Bianco

You have to keep in mind that a number of those 13.5’s or 15% or 18.33% a fair amount of those have traded out.

Leah Hartman – CRT Capital Group

How do you mean traded out, you mean have now converted out?

James Bianco

Yes.

Leah Hartman – CRT Capital Group

Lou, if you just give me a date and then start giving me balances.

Louis Bianco

Let’s use July 31st. The 4% convertible senior subordinated notes have a due date of July 2010; there should be $5.1 million outstanding. We also have a 5.75% convertible senior notes that are due December 2011 there’s $23 million of those outstanding. The 6.75% convertible senior notes that are due in October 2010 are at $7 million. We have 7.5% convertible senior notes due April 2011 that’s $33.5 million approximately. The 9% convertible senior notes that are due in March 2012 of $5,585,000. We have 13.5% convertible senior notes that are due in April 2014 it’s about $8.8 million.

Leah Hartman – CRT Capital Group

The $8.8 million and that’s prior to the upcoming exchange that we expect in late August or that’s pro-forma?

Louis Bianco

This is as of 7/31 so it would be the balance that’s remaining on those notes.

Leah Hartman – CRT Capital Group

Prior to the next 18.3% or did everything exchange out in July?

Louis Bianco

No, everything did not exchange out in July, there was in the 13.5% notes there was $36 million of it and then there was $9 million of preferred series E that exchanged into the notes in June so you ended up with $45 million of the 13.5%.

Leah Hartman – CRT Capital Group

The Series E preferred is gone?

Louis Bianco

That’s gone.

Leah Hartman – CRT Capital Group

So we’re back to, what was the number as of July 31 for the 13.5%.

Louis Bianco

It’s $8,759,000. Then you have 15% convertible senior notes and their due June 2011 that’s $23 million outstanding as of 7/31. The 18.33% convertible senior notes there’s $22.25 million.

Leah Hartman – CRT Capital Group

With more expected to come on August 25.

Louis Bianco

Yes, the second traunch of that.

Leah Hartman – CRT Capital Group

As we turn to the preferred stock we’re down.

Louis Bianco

It’s about $13.1 million.

Leah Hartman – CRT Capital Group

That’s principally A, B, C & D with the E now gone.

Louis Bianco

That’s correct.

Leah Hartman – CRT Capital Group

The A’s and B’s are puttable in the winter of ’09?

Louis Bianco

The A’s in February of ’09 and the B’s in April of ’09.

Leah Hartman – CRT Capital Group

I have about $0.5 million of the A’s and $5.2 million of the B’s.

Louis Bianco

Correct.

Leah Hartman – CRT Capital Group

With that transaction that happened in July, I’m sorry to take so much time but you’ve had a lot of moving parts. We’ve had some changes in the warrant structure I think principally looking at the $0.95 warrants issued in April of ’08.

Louis Bianco

The warrants would have actually I think they were initially issued at $0.95 and they were adjusted to $0.79.

Leah Hartman – CRT Capital Group

So they’re all outstanding?

Louis Bianco

The warrants we had some of them repurchased debt the warrants area actually were retired with those repurchases there was a 9% for example 9% warrants related to $5.25 million of 9% that were when we repurchase that in related to the April deal we retired those warrants related to that $5.25 million redemption in April. There has been the retirement of additional warrants along with some of the note repurchases that we did related to the 18.33%.

For example we repurchased some of our 13.5% notes as well in July the $8.8 million of that has been retired as well so the warrants related to that were actually came back to us as well.

Leah Hartman – CRT Capital Group

Maybe we can go in detail off line on that. On the new 18.3% debt how many years or how many coupons do you have to escrow on cash?

Louis Bianco

It would be for three years of escrow on that.

Operator

There appear to be no further questions are there any further points you wish to raise?

James Bianco

Let me say in closing it’s obviously been a very challenging yet exciting time for us at the company. We’re transformed the company back to commercial in the late stage product focus allocating resources only to marketed products Zevalin and products under marketing review or completing phase three trials. Further reductions in our operating expenses and the prospects for growing sales revenues for Zevalin and potential for approval subsequent commercial sales of OPAXIO and Pixantrone.

We believe the next 12 to 18 months can really represent a turn around story for CTI. Rebuild much of the value we believe is currently underappreciated in our pipeline. As always, we appreciate your support of our mission and we thank you for your time and attention this morning.

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Source: Cell Therapeutics, Inc. Q2 2008 Earnings Call Transcript
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