Cytori Therapeutics, Inc. (NASDAQ:CYTX) Q4 2008 Earnings Call Transcript March 6, 2009 10:30 AM ET
Chris Calhoun – CEO
Marc Hedrick – President, Chief Scientific Officer and Medical Director
Steve Brozak – WBB Securities
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cytori Therapeutics conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions). This conference is being recorded today, Friday, March 5th, 2009. I'll now turn the conference over to our host, Chris Calhoun, CEO. Please go ahead, sir.
Great, thank you. Good morning.
Before we turn to the Company's update, I need to let you know that our discussions today will include forward-looking statements regarding events and trends, which may affect the Company's future operating results and financial position. Some of the risks and uncertainties are described in the Risk Factors section of Cytori Therapeutics' 2007 Form 10-K and subsequent SEC filings available either through the SEC or Cytori's website.
To start, let me quickly summarize the key points for today's call. First, the Company ended 2008 with $13.9 million in cash and accounts receivable. Cytori will require additional capital in the near term, and the Company is currently in certain discussions to accomplish this objective. The top priority in 2009 is to move as rapidly as possible to reduce our cash needs and accelerate to profitability. Toward this end, we're moving quickly to reduce our cash operating loss to approximately $1 million per month.
Product revenues were $4.5 million, predominantly derived from clinical system sales, along with the first bank sale in Greece. At year end, we have 54 systems in the field, and 820 consumables were shipped during the year. We expect to more than double revenue this year, with a revenue target of $10 million, and we are off to a strong start in Q1, in part supported by our new distribution partnership with General Electric in Europe.
This quarter, we installed the first Stem Cell Bank in Japan. We're nearing 50% enrollment in our RESTORE II trial, and we have completed the second dose cohort in PRECISE, and the Data Safety and Monitoring Board has deemed that the first two dose cohorts are safe, and the study is clear for continued enrollment. Finally, we have very exciting updates for you regarding APOLLO, which I will discuss further in a few minutes.
Now, let's proceed with a more detailed update. I have three goals for the call this morning. First, I want to summarize the progress we've made in the market in 2008. Second, I want to address the financials and specifically the balance sheet, and give you in as much detail as I can our road map to address this issue over both the short and long term. Finally, I'd like to present our major goals, milestones, and regulatory and political strategies for 2009.
This past year was critical for Cytori, because we showed something very important, specifically that our technology works, and does so, so well in fact that doctor and hospitals will pay a significant price for it. We also showed that a sophisticated medical company like General Electric recognizes the value of the technology, and is dedicating significant resources to Celution products to their expansive customer base.
Furthermore, we showed something much more fundamental; namely, that the technology is a real platform that can be used successfully by many types of physicians to treat patients with many different conditions. These factors are important, because together they validate both the technology and the business model that we have discussed with you so many times, and that we have all worked so hard to create.
Our product revenues for 2008 were $4.5 million, predominantly derived from clinical system sales, where we realized significant early traction in key markets. We also sold and installed the first StemSource Cell Bank in Greece. As previously discussed on the Q3 call, StemSource sales were subjected to longer sales cycles than initially anticipated. Subsequently, we achieved an important milestone this quarter, when we installed the first StemSource Cell Bank in Japan at a premier hospital.
So what was the basis of this success in the sale of clinical systems? Most of the demand was, as expected, from plastic and reconstructive surgeons. Some of these physicians desired Celution to differentiate their practices from their peers, while others wanted to offer better treatment options and outcomes to some of their toughest surgical challenges.
For example, one physician in Japan who owns multiple clinics has adopted the system so that he and his partners can perform breast augmentation surgery without implants, and has treated now well over 100 patients. Another doctor in Italy has patients with complications with breast implants, and is using the system to correct these problems that are almost impossible to fix otherwise. Additionally, in the background is a growing group of doctors who are using the technology for lumpectomy reconstruction. This represents an example of the increasing demand we are seeing in the emerging market for cell-based regenerative medicine.
Cytori has developed the Celution system to address this market. The Celution system includes reusable solution devices, per-treatment consumable sets, harvest and delivery instrumentation, and proprietary enzymes; which collectively enable physicians real time access to their patient's own, safe, clinical-grade cells at the point-of-care. This is the only such system broadly available in Europe today that has been shown to be safe in both intravascular and nonvascular applications. Availability of cells at the point-of-care enables physicians to treat patients with a broad array of applications.
Certain physicians may even choose to study patient outcomes, to understand the benefit of these cells, under their own independently-sponsored and regulated studies. Such translational efforts are growing, and already represent applications as diverse as wound healing, radiation injury, breast reconstruction, breast augmentation, HIV-related facial wasting syndrome, vocal cord paralysis, burn, urinary incontinence, fistulae repair in Crohn's Disease, bone regeneration, cardiovascular applications, peripheral vascular disease and renal insufficiency, acute kidney injury, and liver disease, among others.
We expect the breadth of these applications will grow significantly, as physicians continue to adopt cell-based regenerative medicines into their treatment strategies based on the recent availability of safe, clinical grade cells at the point-of-care, using our Celution system.
Access to clinical-grade cells has been the principal worldwide limitation to cell therapy, and today we have solved it. Physicians can currently use the clinical-grade cell output directly. Some may additionally choose to work with their ethical committees and governments to study new therapeutic opportunities and uses for the cell output of Celution.
The independently-sponsored Enhanced Breast Augmentation study, now completed, was the first example of this type of study. The list of translational studies continues to grow. Presently, 15 studies are active or nearing enrollment. Beyond the benefit of boosting sales, these studies broaden the knowledge of the utility of the cells with very minimal investment on our part. One investor recently described it like this, that we are not fighting the war but rather supplying the weapons and ammunition.
To further illustrate the point, I would like to share two instances of how this technology is working. The first patient treated in a study sponsored by Nagasaki University is a 90-year-old woman, 40 years after radiation treatment for uterine cancer. She had an approximately 100 square centimeters of non-healing sore on the upper buttocks that had sacral or backbone exposed. Untreated, it was a major disability that would result in sepsis, and possibly death. A little over 60 days from a single surgery using our technology, the wound has healed.
At Nagoya University, the first patient was treated for urinary incontinence, and is now able to control his urine. He's a man that had a radical prostatectomy, and like many of these patients had had post-operative incontinence, which was significantly affecting his daily life. Now after treatment in the study, he's regained his continence and has resumed his normal activities. The cells from the system were formulated to produce a spongy and, we believe, contractile implant to support urinary sphincter closure and muscle action. A few more patients currently being enrolled in the study will allow physicians to determine the permanence of the effect.
In summary, our 2008 sales was an important start, with particular success in clinical sales. In total, we ended the year with 54 Celution units in the field, 40 were sold and 14 were placed in clinical sites and trial centers, some of which are also generating consumable revenue. In addition, 820 consumables were shipped during the year. It's our intention to continue to monitor and report unit numbers in this manner going forward, in addition to the other financial metrics, to help understand our business.
Next, I would like to discuss the rest of our 2008 financials. We ended the year with $12.6 million in cash and cash equivalents in addition to $1.3 million of accounts receivable, compared to $11.5 million in cash and cash equivalents and effectively no accounts receivable at the end of 2007.
Full-year operating expenses were reduced in 2008 to $34.8 million, compared to $37 million in 2007. Cost reductions in 2008 are mostly attributable to third and fourth quarter reductions in general and administrative, and to a lesser degree, research and development expenses. It's important to also understand that approximately $5 million of our operating costs were non-cash items.
As I mentioned earlier, a top priority in 2009 is to move as rapidly as possible to reduce our cash needs and accelerate to profitability. The global economic turndown means that we must continue to adjust our budgets to achieve our operating goals. Cytori will require additional capital in the near-term, and the Company is currently in discussions regarding potential options to improve its cash position. At the same time, we're actively managing our costs downward at a significantly greater pace than 2008, while preserving our core sales and marketing efforts. In addition, we're working to broaden our distributor coverage into new markets, including expanding our GE distribution partnership. We're fortunate that we have developed a highly-differentiated product that is effective, affordable and rapidly gaining broad visibility.
Having invested in developing this technology during the past five years, we can now streamline and dedicate our resources to driving commercial success. As a result, costs related to R&D can and will be reduced significantly, including clinical costs, as I will discuss in a moment. In addition, we will be further reducing G&A costs.
In specific financial terms, our near-term goal is to reduce our cash operating expenses to approximately $18 million on an annual basis. This is expected to reduce cash operating losses to approximately $1 million per month in the near term. Additionally, we plan to leverage our clinical data in breast and cardiovascular disease, and the increasing translational clinical work, to establish a partnership to future develop the technology in key markets, and bring specific channel knowledge and strength that will drive Cytori to profitability in 2010. We are in active discussions with a number of major medical companies, and believe more than ever that a material partnership or other strategic transaction is possible during the year.
Now let me better explain our business objectives for 2009, and how we will achieve them. First, let me provide a quick overview, and then followed by more detail, of our 2009 milestones and goals for Cytori. These include the following. To exceed our revenue targets of $10 million; to expand our global distribution network; to expand Celution system product claims and reimbursement in Europe; to complete enrollment and preliminary -- and report preliminary results from the RESTORE II breast reconstruction study; the US introduction of key complementary cosmetic and reconstructive surgery products; to finalize US clinical development and regulatory strategy; and to complete enrollment in our two cardiovascular studies, PRECISE and APOLLO.
With respect to sales and sales forecasting, we now have 12 months of market experience selling Celution systems, complementary equipment, and assessing consumable reorders, which provides us with a framework to build a more reliable sales forecast. Furthermore, we've been able to continually advance our channel model, improve our access to and manage the distributor sales process, and establish a significant commercial collaboration with GE for certain key markets. As a result, we feel confident forecasting at least $10 million in revenue this year, and we are off to a strong start so far in Q1.
Cytori is working in several ways to establish reimbursement in Europe for breast reconstruction. First, we're working with development [ph] organizations to leverage existing reimbursement codes for current breast reconstruction techniques, and apply them to our technology. Second, with our most experienced doctors in key markets, we're working to leverage existing clinical data that they've already generated, to accelerate a specific DRG reimbursement in their local geography for our products. Finally, we're working with our European notified body and regulatory authority to expand the existing market claims to include breast augmentation and breast applications in advance of -- in both applications in advance of the RESTORE II study.
As of today, the RESTORE II study has enrolled 28 patients out of a maximum of 70. Five sites are enrolling, and three more are waiting internal study approvals, and we expect the study to be fully enrolled during the year. As the study is open label, we are reviewing six-month data as they come in, and early assessment currently indicates good patient and physician satisfaction. We believe it may be possible, if supported by the data, to use the results of the earliest enrolled patients to accomplish the key goals of the study, claims expansion and reimbursement, in advance of the final data from the last patient treated.
Relatedly, Dr. Kamakura has completed an investigator-initiated study he termed ENHANCE, using the Celution system for breast augmentation. He has now obtained nine-month data on all 20 patients in this study and that data is currently in the manuscript phase, and will be reported at a yet unannounced forthcoming medical meeting.
Cytori has reviewed the aggregate data that Dr. Kamakura has collected, and believes the data shows safety, breast enhancement, and importantly, minimum volume loss of the implant over nine months. In his practice, Dr. Kamakura and his team have now treated well over 100 patients using this technique, and growing acceptance is being seen in the market, even prior to the publication of the data. Dr. Kamakura continues to expand Celution-based treatments in his practice, and by the end of this quarter will have Celution systems in half of his eight clinics across Japan.
Turning to our two cardiac trials, we have exciting, new information to report on both trials. Regarding our APOLLO safety and feasibility trial for acute myocardial infarction, or heart attack, we have finished the fist dose cohort. The Data Safety and Monitoring Board and our investigators have agreed that the objectives in the APOLLO trial have been met.
Specifically, the study has shown that physicians can perform a liposuction on a fully anticoagulated patient. The Celution system can process their stem and regenerative cells at the point-of-care, and they can deliver these cells safely down the coronary artery within 24 hours after the patient has had a major heart attack. Furthermore, investigator review of the initial five patients now at six-month follow-up is suggestive of a therapeutic effect at the lowest dose cohort, as was reported at a recent cardiac stem cell meeting in New York, even though the study remains blinded to Cytori at this time.
Among their conclusions is the objectives of APOLLO have been met, and we do not need to proceed with further dose escalation at this point; rather, while we await the six-month data unblind and assess the effects, we have started work with our investigators and regulatory bodies to plan a pivotal European study to an obtain cardiac claims and reimbursement. The DSMB also agrees that the efficacy data presented by the investigators at the Warren Sherman [ph] meeting warrants further assessment of the dose used by the first dose cohort in a larger study.
The DSMB will work with the APOLLO Steering Committee on the next larger study, formally evaluating safety and performance of the ADRC's in patients with AMI. Additional funding or partnership dollars will, however, be needed to proceed with this study, as well as a future US trial. The ultimate European-based study size will be determined by review of the data and statistical evaluation. We anticipate it will be approximately 200 patients.
As for our PRECISE safety and feasibility trial for chronic ischemic heart disease patients, we have now completed the second dosing cohort. Concurrently with APOLLO, the DSMB has deemed the first two cohorts to be safe, and has provided approval to move forward, treating patients in the next cohort. We can further report that thus far, 24 patients have been enrolled; and although, like in the APOLLO trial, the study is double-blinded, we've observed lower than expected mortality in this study to date. In contrast, reported cardiac-related mortality rates of 15% to 20% are expected in this very sick, limited-option patient population.
On our last call, we discussed our intention to better explain our US regulatory strategy to the degree to which we were able. First, please recall the Cytori currently has three 510(k) clearances on parts of the Celution system. These clearances will serve as predicates for future submissions.
Second, late last year, development was completed on Cytori's enzyme product, Cellase [ph]. This is a critical aspect to our US regulatory strategy. To achieve US regulatory approval, we believed it was necessary to have a mammalian-free, GMP-produced, sterile-packaged enzyme product. We co-developed this proprietary enzyme with a large pharma partner during the past three years, and have exclusive market and use rights in the field of adipose tissue. This will be a significant barrier to entry for potential competitors, and an important gating item for gaining approval in the US, Japan, and many other key markets around the world. Based on this key milestone, Cytori has filed a request for designation with the FDA Office of Combination Products. We expect a decision in early May that will determine which office within the FDA will regulate and clear the Celution device. Based on this decision, we will file for device clearance at the appropriate agency for Autologous Fat Transfer claims.
Third, Cytori intends to sell StemSource Cell Banks and related products in the US to hospitals and cell banking companies interested in using the core processing technology for adipose stem and regenerative cell banking. There are no specific claims made for this application. All banking system products are classified as laboratory equipment, and would be used under the Good Tissue Practices guidelines and fully-developed standard operating procedures under the purview of the cell bank itself. The only limitation today for StemSource sales in the US is the need to establish a partner for sales and marketing of these products.
Fourth, Cytori has recently developed several complementary products for use with the Celution system that we intend to launch in the US this year. The first is a patent pending meter-delivered device branded as Cell Brush [ph]. The reusable device was developed by Cytori, and there is no comparable device on the market. Early physician feedback thus far has been uniformly positive. The product currently has a CE Mark in the EU, and Class 1 approval in the US, and will be sold for delivering traditional fat graft material to patients. We will introduce the Cell Brush at the ASAPS Meeting in Las Vegas in May.
In addition, Cytori has developed a patent pending fat graft washing system called Pure Graft [ph]. The largely disposable-based system was developed by us to be used in conjunction with the Olympus version of the Celution system. Used in combination with the Celution system, physicians can effectively triple the amount of tissue they have available for breast surgeries, or use very small volumes for facial procedures, and significantly lower the processing time. This is a major expansion of the system capability, and makes use in large volume breast augmentation more widely applicable. Furthermore, the Pure Graft system removes excess saline and contaminants from the fat matrix of the cell graft, making the volume correction much easier for the physicians to estimate.
Based on marketing research and physician feedback, we've elected to introduce the system as a stand-alone product in the US late in 2009, after we've achieved clearance from the FDA. As a stand-alone product, the resulting washed and saline-free fat does not compete with the dramatic efficacy being seen by the cell-enhanced fat tissue from Celution. However, it substantially shortens the time, and eases the processing of traditional fat grafting for those physicians already applying this technique in the US. But strategically, we believe this product will provide a natural gateway to the added value of Celution, once it's available in the United States.
In summary, I hope that it is as obvious to you as it is to us that our technology works well for many clinical situations, and is already changing the face of medicine and impacting patient lives. In addition, the business model is equally successful, as we have shown in 2008. There is increasing product demand and acceptance in key markets to provide assurance of future revenue growth.
Thank you very much for your time and interest. Moderator, I'd now like to open up the call to questions.
Thank you sir. (Operator instructions). Our first question comes from the line of Steve Brozak with WBB Securities. Please go ahead.
Steve Brozak - WBB Securities
Congratulations, gentlemen, on the broad-brush stroke here as far as all of the different applications, but I -- you know, the critical part here that I think everybody is waiting for is, how do you foresee the relationship with all of these investigators using your product and coming back with data? You know, how will you look to, let's say, jump on the stuff that's the most promising? Can you give us a description of what you, you know, because I'm -- most successful new technologies basically have unintended positive consequences. How are you prepared to handle that?
Hi, Steve. It's Marc Hedrick, thanks for the question. Well, first of all, the broad utility of the system is an enormous benefit for us. It allows us to safely enter areas in a relatively inexpensive way, leveraging key relationships around the world that generate feasibility data. To make sure that the technology is implemented safely, Dr. Kai Pinkernell, who's a cardiologist that works with us, is managing that group of 15 studies to ensure that the technology is applied wisely, and that the data set being generated will give us important information about the technology. So that's how we're managing it.
You rightly allude to the next step, which is what do you do if the data is really great? And so that's where, you know, our ability to take that data, perhaps go into a larger study in an investigator initiated way, or more likely identify an appropriate partner, who can work with us to develop that application and related technology, do the appropriate clinical work, receive regulatory approval claims, and ultimately reimbursement. So we've built this nascent infrastructure inside the Company to manage those studies in parallel with our formal clinical trials, in the hopes that that data can grow, be successful, and provide partnership dollars later on.
Steve Brozak - WBB Securities
Great. Good luck. I'll jump back in the queue.
Thank you. (Operator instructions) There are no further questions at this time. I would like to turn it back to Chris Calhoun, CEO, for any closing remarks.
Great, thank you.
Cell-based regenerative medicine is here, and Cytori stands alone in its capacity to serve this emerging market by providing affordable and practical products that enable safe, clinical-grade cells at the point-of-care for a wide array of applications. So far in this year, we've already seen many patients treated for breast augmentation and reconstruction, but also patients have been treated for incontinence, facial rejuvenation, wound healing, implant salvage, acute heart attack, chronic myocardial ischemia, and recently the first patient was also treated for cirrhosis of the liver.
In the coming weeks and months, burn patients, kidney injury, kidney failure, peripheral vascular disease, and many other important devastating diseases, will be added to that list. For cell-based regenerative medicine, today we have the Celution system, which we strongly believe will rapidly become the standard for point-of-care cell therapy.
Thank you for your time today.
Ladies and gentlemen, this concludes the Cytori Therapeutics conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236, with access code 111-268-47. ACT would like to thank you for your participation. You may now disconnect.
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