Cytori Therapeutics Management Discusses Q3 2012 Results - Earnings Call Transcript

| About: Cytori Therapeutics (CYTX)

Cytori Therapeutics (NASDAQ:CYTX)

Q3 2012 Earnings Call

November 08, 2012 5:00 pm ET


Christopher J. Calhoun - Co-Founder, Vice Chairman, Chief Executive Officer, Secretary and Member of Executive Committee

Marc H. Hedrick - President and Director

Mark E. Saad - Chief Financial Officer


Stephen G. Brozak - WBB Securities, LLC, Research Division

Lee Graham


Good afternoon, ladies and gentlemen. Welcome to the Cytori Therapeutics Business Update and Third Quarter Results Conference Call. Today's call is being recorded.

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.

I will now turn the call over to Chris Calhoun, CEO. Please go ahead, sir.

Christopher J. Calhoun

Thank you. Good afternoon, and welcome to our quarterly business update. I'm joined today by Dr. Marc Hedrick, our President; Mark Saad, our CFO; and Clyde Shores, our Executive VP of Marketing and Sales.

Management has delivered strong results during the quarter, and for the 9 months of the year in each of our 3 business areas, achieving many of the goals established for 2012 and setting the foundation for leadership and growth in the Cell Therapy field.

To review, our 3 principal objectives are to advance our cardiovascular disease pipeline, grow the commercial business and achieve our operational and financial performance goals.

We've provided a shareholder letter that discusses our progress in greater detail. This is available on the homepage of the Investor Relations section on our website.

Before we move into the question-and-answer session, I'd like to discuss some of the highlights from the quarter. Let's start with our 2 major achievements in Q3.

Our most notable achievement during the third quarter was the award of our BARDA contract for up to $106 million in development funding for Cytori's Cell Therapy as a treatment for thermal burns combined with radiation injury. It's an important accomplishment that serves as recognition of the value of our technology and leadership position, expands and accelerates our U.S. product pipeline and provides a very achievable path to substantial, non-dilutive funding.

From a strategic perspective, this contract complements our ongoing efforts in soft tissue repair indications, specifically wound healing.

The second major achievement during the third quarter was establishment of a full commercial license in Japan and subsequently we obtained Class I clearance for our portfolio of products, including the Celution System, StemSource System and Puregraft. This clearance is expected to accelerate sales growth in Japan, leading a growing demand from researchers at academic hospitals seeking to perform investigator-led studies utilizing Cytori's technology.

Now let's turn to the cardiovascular disease pipeline. Our FDA-approved clinical trial ATHENA for refractory heart failure is up and enrolling patients. We want to thank Dr. Tim Henry at the Minneapolis Heart Institute Foundation for enrolling the first patient back in September and initiating the trial. That first patient is doing well as of our last report.

Today, both Minneapolis Heart Institute and Texas Heart Institute are actively screening and enrolling patients. Collectively, these sites have 7 patients screened and are being scheduled for treatment. An additional 10 patients are actively in the screening process.

Three of the remaining 4 sites are in the final stages of initiation and we expect they will be actively screening patients by the end of this month, while the sixth center will be up and running by the end of the year. As a result, we're tracking to achieve full enrollment by mid-2013 as previously projected.

Our pan-European advanced pivotal trial for acute myocardial infarction has been amended to meet current regulatory standards, improve the trial design and to expand the utility of the trial toward reimbursement. Screening is now active at the first approved site. Two more sites are projected to be active before the end of the year. Additional sites will continue to come online as individual country regulatory approvals and ethics committees are achieved.

Currently, applications are under active review in The Netherlands, Italy, France, Spain, Germany and Canada. The application for the U.K. will be submitted this month.

Ethics committee approvals have been obtained in France and Italy. We will announce the first patient treated, which we expect will happen during this quarter. We can provide guidance on the enrollment rate and anticipated completion timeline once we have a critical mass of active sites and enrollment rate experience in the trial.

Regarding our CE Mark expansion, we're in the final stages of review of our Intervase product, CE Mark. Multiple rounds of Q&A have been completed, and based on the most recent dialogue with our notified body this week, we believe we are nearing approval. When combined with our existing claims for reinfusion of cells, we believe this combination of claims will allow us to access the broad vascular market in Europe.

Let's move on to our commercial business. In pioneering a brand new field, it's often difficult to find reliable metrics that accurately document the progress that's being made as early utilization and adoption can be inconsistent. But that said, there are clear trends to support our primary mission. Adipose-derived regenerative cells are rapidly becoming the cells of choice in the clinical therapy. There are now more than 40 independent investigator-led studies around the world utilizing or preparing to use the Celution platform in a broad array of clinical indications, like the study recently announced in France for Scleroderma.

In Japan alone, the 6 MHLW-approved studies using the Celution System represent approximately 20% of all approved investigator-led clinical stem cell studies. That market share is set to continue to increase as we're working with 5 more institutions with Celution-based studies that are in the process of application and review in Japan.

When you look to the daily news and clinical reports of success in Cell Therapy, the large majority of these reports involve cells from adipose tissue and account for the vast majority of the reported clinical case reports and news flow. This, too, appears to be gaining momentum.

In the major society meetings, from cardiology to plastic surgery, Cell Therapy is now moving into the spotlight at center stage and included in the mainstream agenda. While more studies around the world continue to document the use of adult stem cells from various sources as safe, many independent studies now showing -- are now showing that bone marrow, the first adult source of cells to be used clinically, has a generally weak therapeutic signal in many of the reported studies and trials. As the field matures, companies, researchers, regulators and clinicians are working hard to distinguish their respective cell products from the general category of Cell Therapy. Each approach has strengths and benefits based on the activity of the selected cell type, which will drive specific mechanisms of action. It is clear that not all cells are created equally nor do they all have the same function, capacity or capability. While this adds complexity, it also creates significant opportunity. The right cell population that provides clear benefit will likely become the clinical choice. Add in ease-of-use and access and the right pharmacoeconomics and that will become the dominant commercial winner in standard of care.

Our approach to Cell Therapy is unique in the field, not selecting and relying on one specific cell type to provide therapeutic benefit, but a heterogeneous population of repair cells that work together in a combination of ways to orchestrate healing and repair.

Coupled with our point-of-care system that provides an affordable and easy access to each patient's own cells, it's no surprise that these cells are fast becoming the cells of choice for clinical Cell Therapy. With more than 5,000 patients treated, 3 completed and 2 active company-sponsored clinical trials and more than 40 investigator-led clinical studies, the data supports a clear and strong signal that adipose-derived regenerative cells are both safe and appear to have clear and consistent clinical benefits to patients.

And Cytori is taking a leadership role in the field. We've been investing heavily in this science and engineering for more than a decade and have, by far, the most comprehensive understanding of these cells. We're also taking a leadership role to counter ineffective or dangerous technologies or groups that make unsubstantiated claims or present inaccurate data.

We recently presented multiple scientific presentations better defining ADRCs, how to effectively obtain safe clinical ADRCs and various other approaches that do not yield ADRCs although they claim to do so.

The Cytori brand is being built on the foundation of a deep scientific understanding and clinical experience. As shareholders, we want you to know that we are taking an active leadership role in the field as we work to build the leading brand in Cell Therapy.

This is also being reflected in our rapidly expanding patent portfolio. Our innovative and novel science, engineering and clinical developments are being translated into patents around the world. Since our last conference call 3 months ago, we've added 5 new issued patents and 4 new allowed patents. More than 75 additional applications are currently under review around the world. Three of these newly issued patents are directed to cardiovascular disease and the other 2 are directed in the soft tissue platform. The 4 newly allowed patents include soft tissue, wound healing, kidney disease and our next-generation device.

On the regulatory front here, as noted last quarter, we have significantly expanded our claims on the broad European approval or CE Mark. During the quarter, we've also effectively opened up the Japanese market, obtaining multiple commercial and medical device company licenses and Class I registration as mentioned earlier on the call.

At the end of the quarter, several new distributors in Japan were appointed, orders received and products shipped that represents approximately $1.7 million in sales that are expected to be recognized as revenue in the near term.

We anticipate a strong fourth quarter as well and are reaffirming our annual revenue guidance of $9 million.

We are also expecting continued growth in Puregraft sales now opening up the markets in Japan and Taiwan, as well as a regulatory approval in Korea this week for Puregraft.

Now turning to our operational and financial performance. The bottom line is we are executing on our stated operational and financial performance goals. For the quarter, Cytori achieved the planned improvement in our operational efficiency and financial performance. Sales and marketing and general and administrative expenses were reduced by 13% in the quarter and for the 9-month period compared to the same periods last year.

R&D expenses were tightly controlled and slightly increased year-over-year as planned and budgeted. And correspondingly, net cash used in operating activities has been reduced by 13% compared with the first 9 months of 2011 and generally stable over the year. We will continue to keep downward pressure on non-R&D expenses and expect further reductions in our cash operating loss during the fourth quarter.

Increase in revenue, collection of receivables and contributions from the BARDA contract will all contribute to reducing the Q4 cash operating loss.

So I'd like to spend some time now and go into some detail on our current cash, capital requirements and financing strategy. The company ended the third quarter with $18 million in cash and cash equivalents. In addition, we expect to receive $3 million attributed to accounts receivable and the additional shipments related to our third quarter approval in Japan.

As described last quarter, we're projecting that the company will acquire an additional $20 million to $30 million in cash to reach breakeven. As we have discussed, there are half a dozen or so opportunities that are progressing toward completion. We committed to completing at least one during the third quarter and that was the BARDA deal and it was accomplished in the $106 million contact.

Currently we have 2 additional strategic deals at the contract stage. We expect to complete and announce at least one of these before the end of the year. Both deals include a substantial upfront cash component.

Before I close these opening remarks, I'd like to take a moment to personally thank Mr. Ron Henriksen for his vision, support and contributions as a member of our board for more than a decade. Ron was one of the founding board members of StemSource, a predecessor company to Cytori. Ron served on our board as Chair for 3.5 years and either participated or chaired various board committees during his tenure.

Ron is generally considered the father of biotech licensing. He led the first deal in the field between Eli Lilly and Hybritech and went on to complete well over 100 partnerships and acquisitions over his career. Without Ron's guidance and input over the last 10 years, Cytori would not be where it is today. We are sincerely thankful for his service to the company, and we wish him all the best in his retirement.

Now in closing, significant clinical, regulatory, commercial and corporate accomplishments continue to define our progress. We are committed to finishing the year strong, achieving all of our core milestones and significantly strengthening the balance sheet.

Now I'd like to take this opportunity to take any questions you may have for me or my leadership team. Jackie, please open up the call.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Stephen Brozak with WBB Securities.

Stephen G. Brozak - WBB Securities, LLC, Research Division

I'm going to head straight to the point. Obviously the BARDA contract is a significant contract and I wanted to try and get greater granularity on it in terms of what you need to do for the "commercial" application for it and how that'll work and what the rough time frames that you're looking are going to be. Because obviously it's something that differentiates you from a lot of other companies.

Marc H. Hedrick

It's Marc Hedrick. With respect to the timelines, it's a 5-year contract but the payments are relatively small at first, approximately $5 million. Those are geared towards achieving some proof-of-concept milestones. So we feel confident that we can get those done ahead of schedule, perhaps at the end of 2013, early 2014, depending on how quickly we can get up and running and the corporate hires and so forth. So we have a high likelihood of getting to those. Then assuming we hit those, then it initiates a couple of different milestones. Those preclinical proof-of-concept studies trigger about $55 million in -- up to $55 million, which includes a path to a pivotal study in the U.S. And that's another key facet of this. It does open up a unique and far-reaching soft tissue application in the U.S. And then ultimately, assuming that there is success in that pivotal, then there's an additional option payment, $45 million roughly, to go into our pivotal -- sorry, pilot before pivotal now. So those represent the $106 million of the contract. That doesn't include the potential commercial applications of the government helping us to pre-place these systems around the U.S. in hospitals, from level 1 trauma centers down to community hospitals, so the nation's prepared if, in fact, the worst-case scenario happens and there are multiple casualties with radiated-related burns from a nuclear accident.

Stephen G. Brozak - WBB Securities, LLC, Research Division

Now just a follow-up on that has to be, how do you see this leveraging, and I'll ask it 2 ways and then I'll hop back out, how do see this leveraging your technology, both on the commercial and on the regulatory side? And again, I'll hop back out.

Marc H. Hedrick

Well, from a technology leverage perspective, and kind of looking forward now to some point during the contract or the development phase or thereafter, should the government decide to purchase these systems and help place them around the country, it puts our technology into many, many hospitals in a pre-deployed, fully trained fashion, so that doctors have access to our technology and it does what -- it does for us what Cytori would otherwise have to do alone, which is to go out and sell hospitals on the technology. The government effectively becomes the main driver in preplacing the capital equipment infrastructure. But then we can leverage, not only for this critical national defense application, but for really any application across the spectrum. And that's a key strategic part of this. And I think Bill recited a couple of -- 3 key things with respect to this that BARDA provides and also NIAID, who was part of the evaluation process, at least for us, substantial third-party validation about the utility of this technology. It took us a long time to get where we are today and there was a lot of scrutiny with respect to our technology and our business model. Secondly, this development contract helps more rapidly move us to next generation technology, which completely changes the cost and pharmacoeconomic equation and that's built into this particular study. And finally, and just to remind you what I mentioned before, it sets up the U.S. government as a if not the key potential customer in the relative near term.

Christopher J. Calhoun

We're being told there's nobody currently in the queue, but we did get an e-mail question in that I'll kind of paraphrase. It references the data coming out of the meeting up in Los Angeles, the American Heart Association. So if any of you are following the news, there's been a number of studies that were presented earlier this week in a late-breaking clinical trial session that predominantly looked at bone marrow cells used in acute heart and the takeaway from most of these studies is that bone marrow is safe but has a weak signal towards therapy. So they're seeing slightly positive outcomes, but generally not seeing a tremendously powerful signal here. One of the headlines that received quite a bit of attention was a study from Dr. Hare in Florida, and he effectively looked at autologous cells as compared to allogeneic cells, both derived from bone marrow. And while the headline focused on the safety aspect, that they both appear to be equally safe, they didn't pick up much of the story on the effectiveness, which really didn't seem to have much improvement. Again kind of a -- something that's very dramatic. So as we look at the field, I think that -- and we look at the data that we're seeing in our differentiated approach that really uses this mixed population of cells, we're seeing a very strong signal even in similar indications like acute heart. So again, I think as the field matures, we don't want to kind of lump everything as Cell Therapy as one bucket, but we want to really start to define what types of cells are companies or investigators studying because each of these different approaches will likely have different safety profiles, different mechanisms and different clinical outcomes. And in the studies that we have seen using the mixed cell approach, which is fairly unique to Cytori, we have a very strong signal towards efficacy, as well as a clearer signal in safety. So we have another e-mail coming in. What does the Class I mean to the business? Mark, why don't you take that one?

Marc H. Hedrick

Thanks for the question. The Japanese commercial approval perhaps represent one of the biggest, most important developments in the Japanese market since our partnership with Olympus many years ago. What's probably not apparent, as it is been going on behind the scenes for well over a year, we've been working on transitioning our K.K. [ph] to a fully operational, fully resourced medical -- independent medical company in Japan. Remember previously we were only able to sell in the Japanese market under a physician's prescription, which is relatively a limited way to sell. And so the transition from selling on prescription to having a fully functional medical business is a nontrivial exercise. We've been working on that for a while. That includes new headcount, logistics center, it includes pharmacovigilance capability, enhanced regulatory and quality certifications and so forth. So this is a massive improvement into our operational capability in Japan. At the same time and in parallel, over the last year, 1.5 years, we've been working with MHLW in a dialogue as to how we can ideally regulate our products in the Japanese market, and we have agreed with them to a 2-pronged strategy. The first is Class I, which is effectively 2 claims [ph], not too dissimilar to 510(k), and they've allowed our key technology platforms to be introduced in the market in this way. And that's the regulatory approvals that Chris just discussed in Japan that led to, from a -- at least from a sales perspective, our best quarter ever. The other aspect of that two-pronged strategy is that for specific commercial applications where we want -- go after a specific indication that we have the Class II and Class III path available and we're working on approval in that as well. So the -- I think the key for us is that, while we don't really get too far ahead of our skis, we think this represents a much heightened ability to sell and to market our technology in Japan, to provide enhanced customer support and we think that this is one of the keys to being able to expand in the translational medicine area that's driving a lot of our sales right now. And this will help drive growth in 2013 and beyond.


We do have an audio question from the line of Stephen Jackman [ph], private investor.

Unknown Shareholder

This contract with the government and -- does that -- with the completion of that or as that goes forward, does that give us any additional ability to use any of the approved soft tissue approvals that have been granted in Europe here in the United States? Or do we have to go through a trial process for each one of those?

Marc H. Hedrick

It's Marc Hedrick. It's a good question. The way that the contract is set up is it presumes that we would develop a specific indication in the U.S. related to burn reconstruction and take that from a pilot clinical trial into a pivotal trial and get claims in the U.S. However, a couple of caveats to that. That burn wound claim is not limited to a terrorist incident. In fact, BARDA wants the technology to be used frequently and broadly in the U.S. so the U.S. is prepared in case the worst-case scenario happens. They don't want to have to get centers up and running in this kind of chaotic time frame around something like this happening, God forbid. So they want the technology used. And this allows it to be used beyond just this very narrow indication. However, the second caveat is BARDA doesn't have to wait until we have a clinical trial or a full regulatory approval to buy the technology for us and put it out because of a potential nuclear disaster and emergency. So they can buy ahead of a potential regulatory approval. There's one other point that I think is relevant. It's related to your question and that is that this validation that comes to this BARDA contract has direct implications in discussions that we're having with governments beyond the U.S. government who have similar concerns about nuclear power plant-related injuries and/or nuclear detonations. And they see BARDA as the global leader and then they are now more interested in establishing a similar relationship with us because of what BARDA has done.

Unknown Shareholder

On a different subject, can you comment on the partnerships, the existing partnerships in Japan with Olympus and Green? And if you talked about that in the beginning, I'm sorry I didn't get on at the very beginning of the conference.

Christopher J. Calhoun

It's Chris Calhoun. So yes, as you've mentioned, Cytori has established multiple partnerships over the years, 2 of which -- actually 3 of which are in Japan. We have a partnership with Astellas and that's essentially an option for a therapeutic indication that they want to co-develop around the world. And while that option exercise period's kind of timing out here pretty soon, we're actively working with them towards defining which areas they want to work on and what a larger, more formal strategic partnership looks like. And I think that's going to ultimately end up in a larger, more formal partnership based on our current activity dialogue with them and that's moving forward. Timing on that's probably, I'd say, sometime into Q1 or Q2. So when I talk about some of the late-stage stuff that we're working on, on the partnership side, I'm not specifically talking about Astellas, although they are one of the ones in the queue that we think is positively moving forward and we expect will get completed. The Olympus relationship, as you know, they've undergone a significant amount of change over the last year or 2, and they're refocusing their efforts on kind of their core business, which is really around the medical technology side. And we've been working pretty closely with our counterparts at Olympus to define how we might or might not fit into that longer-term strategy for them and what would be the best outcome for both of us. And while there's nothing that's finalized yet, we're exploring different paths and some paths include working together and there are paths that include that we kind of go our separate ways. And I think there are advantages to both ones. So as soon as we have something more specific there in terms of the final outcome, we're going to share that. But as of right now, it's kind of status quo and we're working together as we always have. But at the same time, we're really exploring what does this relationship look like going forward and how might that change. So nothing definitive to say about that yet except that we're really looking at it together. Green Hospital has been a partner on the banking side in Japan. There's a number of banks that are in the funnel. I think we're expecting one more this quarter. Some of them, Green Hospital is really behind, selling and driving these bank sales and we're supporting them. And they've been a good partner to us and they continue to be a good partner and nothing's really changed on that front. So that's the kind of the overview of the Japanese partnership discussion.


Your next question comes from the line of Lee Graham with RBC Wealth Management.

Lee Graham

This is probably to you, Mark Saad. On the partnership, the potential partnership deal, is it -- can I assume, and I know it may be a high assumption, but can I assume that -- or should I assume that it will be enough to fund your operations for the foreseeable future until maybe BARDA kicks in?

Mark E. Saad

Thanks, it's Mark. The way I would describe the transactions, which include multiple at the contract stage is that the value -- the aggregate value of the near term or upfront money of the proposed transactions go well beyond the stated capital needs of the company. So on that basis alone, we feel as if the realistic achievable outcomes go well beyond our capital needs. Over and above that, and I don't know how well understood it is, the BARDA deal, which has been delivered, as we achieved that within Q3, does carry a substantial capital improvement to the company when one looks at the aggregate elements of that contract and then within that, look at the attributed overhead recruitment that goes to the company, the direct cost that we're currently incurring that can be reasonably applied to the contract activities and the profit margin that's negotiated in. And if you look at the aggregate of those things, the pickup potential to the company of an already delivered contract meets or exceeds our aggregate capital needs on its own and then you factor in other things. So we have several things that are completely strategic that have either already been delivered or we believe have a high probability that do cover us there. And then we look elsewhere as in parallel for -- as we need to, are always in parallel discussions on the investor front as always. But we see a lot of strategic potential.


Ladies and gentlemen, we have reached our allotted time for questions. I would now like to turn the floor back over to Mr. Chris Calhoun for any additional or closing comments.

Christopher J. Calhoun

Great. Thanks, Jackie. We want to thank you all, again, for your time and support as stakeholders and shareholders in our organization. For the remainder of the year, we remain committed to executing across the 3 core areas of our business, advancing our cardiovascular pipeline, growing the commercial business and strengthening our balance sheet through strategic partnerships. Thank you very much.


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

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