Cytosorbents Corp (NASDAQ:CTSO) Q2 2016 Earnings Conference Call August 9, 2016 4:45 PM ET
Amy Phillips - Pascale Communications, IR
Phillip Chan - President and CEO
Kathleen Bloch - CFO
Vincent Capponi - COO
Chris Cramer - VP -Business Development
Sean Lee - HC Wainwright
Andrew D’Silva - Merriman Capital
Brian Marckx - Zacks Investment Research
Jonathan Aschoff - Brean Capital
Good day everyone, and welcome to the CytoSorbents Second Quarter 2016 Financial Results Conference Call. [Operator Instructions] Today's call is being recorded. And at this time, I would like to turn the conference over to our moderator, Amy Phillips. Please go ahead.
Thank you and good afternoon. Welcome to the CytoSorbents second quarter 2016 operating and financial results conference call. Joining me today from the company are Dr. Phillip Chan, Chief Executive Officer and President; Vincent Capponi, Chief Operating Officer; Kathleen Bloch, Chief Financial Officer; and Chris Cramer, VP of Business Development. Unfortunately Dr. Christian Steiner, VP of Sales and Marketing from Germany is not able to join our call today.
Before I turn the call over to Dr. Chan, I'd like to remind listeners that during the call, management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from the results discussed today. And therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC.
Any projections as to the company's future performance represented by management include estimates today as of August 9, 2016, and we assume no obligation to update these projections in the future as market conditions change. During today's call, we will have an overview presentation covering the financial and operating highlights for the first quarter by Dr. Chan and Ms. Bloch. Following that presentation, we'll open the line to your questions during the live Q&A session with the rest of the management team.
At this time, it's now my pleasure to turn the call over to Dr. Phillip Chan. Dr. Chan, go ahead, please.
Thank you very much, Amy, and welcome everyone to the call. CytoSorbents is a critical care focused immune therapy company using blood purification to prevent or treat life-threatening inflammation in the intensive care unit and cardiac surgery using CytoSorb blood purification.
CytoSorb removes the fuel to the fire of inflammation and target the $20 billion opportunity in critical care and cardiac surgery. CytoSorb is approved in the European Union as the only specifically approved extracorporeal Cytokine filter and is clinically proven to reduce key cytokines in the blood of critically ill patients.
It is approved for use in any situation where cytokines are elevated and more with standard dialysis in heart-lung machines in hospitals worldwide. It also removes many other inflammation mediators such as free hemoglobin, bilirubin, bacterial toxins, activated complement and host of other inflammatory mediators that are contributing to this uncontrolled life-threatening inflammation. The safe and well tolerated now in more than 14,000 human treatments performed worldwide.
The goal of CytoSorb is to control this deadly inflammation to prevent or treat organ failure rather than allowing patients to spiral down into organ failure caused by this uncontrolled deadly inflammation, our goal is to reduce key inflammatory mediators from blood as a way to treat this life-threatening inflammation to the edge of the inflammation so that it does not cause organ failure and organ injury.
The goal here is to treat aggressively upfront hopefully trying to limit the adverse events that happened from this inflammation, thereby improving patient outcome and survival while decreasing the massive cause of ICU and patient care. But it’s not just the millions of people who are admitted every year for diseases like sepsis a key respiratory distress syndrome burn injury, trauma, pancreatitis, influenza, and complications of surgery. But what I think is very unique about our company is how strategically positioned CytoSorb is to respond to the ever growing health threats throughout the world.
Whether or not it be the ever present threat of the epidemic dzure [ph] of epidemics like H1, Swine Flu Influenza or ebola or MERS outbreaks or the SARS or MRSA infections or whether or not it’s the nearly 10 million people who die every single year from sepsis, which is the over results immune response to life-threatening infection and these include well known celebrities for example like, Muhammad Ali and Paddy Jute who died recently, but also includes many well-known celebrities such as General Norman Schwarzkopf, Bernie Mac, Op Hope, James Brown, Wesley Neilson, Jim Henson and many others.
But also -- it also includes many patients who are affected by the various natural disasters that seem to be happening on a very regular basis such as Tornados, earthquakes, Tsunamis, casualties of war, wildfires and other things.
And it also includes terrible tragedies like the terrorist attack on Bastille Day last month in East France, where a truck driver ploughed through a large group of people watching fireworks killing 85 people and injuring more than 300 whether or not it was the bombing in Brussels in March where 32 people were killed and more than 300 injured, 62 of which were critically injured. Unfortunately this is a world we live in, but fortunately this is the role CytoSorb was intended to play.
So with that let me turn it over to Kathy to cover our financial highlights for the quarter. Kathy?
Thank you, Phil and good afternoon everyone. For today’s call I will be provide an update regarding CytoSorbents’ second quarter 2016 financial results including product sales progress, a review of the recent financing we completed with Bridge Bank and also an update around our working capital and cash run rate.
CytoSorb product sales for the second quarter of 2016 were approximately $1.9 million, which is a 140% increase over product sales of $773,000 for Q2 2015. Our Q2 2016 annualized product sales run rate rose to $7.4 million, which is more than double our annualized run rate of approximately $3.1 million one year ago.
Total revenues, which includes both product sales and grant revenue were approximately $2.2 million for Q2 2016, as compared to approximately $964,000 for Q2 2015, which is an increase of approximately 131%. In Q2 2016 our gross margins rose to approximately $1.3 million, an increase of approximately $850,000, as compared to gross margin of approximately $499,000 for the second quarter of 2015.
We continue to experience strong gross profit margins on product sales. For Q2 2016 gross profit margins increased to approximately 68% largely as a result of the sales mix as compared to gross profit margins of approximately 63% for Q2 2015.
Now let's take a look at our quarter-over-quarter product sales. Q2 of 2016 product sales of approximately $1.9 million represented our best quarterly product sales ever. Q2 2016 product sales were approximately $255,000 or 16% higher in Q1 2016 product sales. Q2 2016 represents the fifth consecutive period for which we have reported quarter-over-quarter product sales growth. It’s also our fourth consecutive quarter of record sales. We make a note here that the change in the euro relative to the dollar did not have a material impact on our sales when comparing 2016 to 2015.
Turning to our six months financial results, registered product sales for the first half of 2016 were approximately $3.5 million, which is 134% increase over product sales of $1.5 million for the first half of 2015. Grant revenue grew 177% from $210,000 for the first half of 2015 to $582,000 for the first half of 2016. Total revenue which includes product sales and grant revenue were approximately $4 million for the first half of 2016, compared to $1.7 million for the same period in 2015 an increase of approximately 139%.
Next, we'll take a look at our trailing 12 months product sales chart. Now we actually have enough history to be able to present this chart on a year-over-year basis and the chart clearly illustrates the trailing 12 months product sales from the last four years and it clearly demonstrate the increasing trajectory we are experiencing. The three year compound annual growth rate or CAGR was 145% over this period. We are pleased to be experiencing increases in both direct and distributed sales.
The overwhelming majority of our product sales increases are a result of repeat orders from our existing customers then to a lesser extent as a result of the addition of new customers in territories. But we believe the impact of new customers and territories will become significant. Part of our growth is being driven by distributor and partner sales.
Let's look at the world map. As we have indicated we've expanded distribution to include 37 countries around the world. Just in the last quarter alone we've had many important distributors come online who are now either contributing to revenue or in a position to contribute to revenue. For Fresenius had its official product launch in countries Poland, France, Sweden, Denmark, Finland and Norway. In May we achieved product registration in Russia and our distributor there Intensive Med placed their very first order.
We also received our first orders from Vietnam, Spain and Portugal in Q2 2016. And then in July we announced that we've added new distributors for Hungary, The Czech Republic and Slovakia and all of these countries have contributed to our revenue as well. In fact we expect geographic expansion to a powerful driver of future growth. In January of 2016 either direct or through distributors we had established distribution in 32 countries. But as we previously discussed only 15 of those countries were actually contributing to revenue.
And those shown on this chart at the far left hand side. The remaining 17 countries in January are in the process of receiving approval to distribute CytoSorb completing registration or waiting market launch or some other matters necessary before beginning to commercialize CytoSorb. We have had very good success in moving countries to a revenue producing status. In August 2016 we've now expanded distribution to 37 countries.
But most importantly we now have 28 countries who are in the contributing to revenue category. In addition we expect to have Canada, which is a very important market for us come online soon. We anticipate the standard ramp up period for these new countries as the sales teams there gain physician support and usage. But with our next model of direct and distributor sales by bringing new territories into revenue producing status and order growth within the territories with increase adoption and repeat sales. We believe we have laid the foundation for dramatic growth and we fully expect that this strategy will contribute to a significant inflection point in our product revenue growth for the future.
Now, I'd like to make a few comments on our recent debt financing. On June 30, 2016 we entered into a loan and security agreement with Bridge Bank a division of Western Alliance Bank, by which the bank agreed to loan the company up to an aggregate of $10 million and we drew down on the first $5 million term loan, which provided $4.9 million in net proceeds, which we will use for working capital purposes and to fund general business requirements.
The financing terms are very competitive compared to other debt or equity options. The loan bears interest at the 30 day U.S. LIBOR rate plus 7.75%, which was 8.2% at June 30, 2016. The effective interest rate on the term loan including all fees required to be paid over the life of the loan is 10%. The company will enjoy an interest only period for the first 12 months of the loan, then will be required to pay 36 equal payments of principal plus interest with the maturity date of July 1, 2020. There are no financial covenants related to this first $5 million term loan.
Subject to certain conditions, the company had its sole discretion the ability to receive another $5 million term loan. If this additional tranche is taken, we will receive an additional six month interest-only period.
Bridge Bank will be entitled to a success fee of 6.37% of the funded loan amount upon a liquidity event or if our common stock trades at $8 or above for five consecutive days. The success fee if applicable will be payable in stock or in cash at the company’s sole discretion.
We are very pleased to have been able to secure this non-dilutive funding and to be working with a premier provider of commercial services in Western Alliance Bank. Of course, the most important factor about the debt financing is that it supplied non-dilutive working capital to fund our ongoing operations and our clinical trials. As we have stated in the past, given the state of the equity markets, we viewed debt as a useful bridge to a more traditional financing.
As of June 30, 2016, we had approximately $9 million in cash and short-term investments, which we believe will provide funding for our operations for slightly more than one year.
Turning to our capital structure. As of June 30, 2016, we have approximately $29.5 million common shares on a fully diluted basis.
And now, I’d like to turn the call back to Phil. Phil?
Thank you very much, Kathy. What I like to do now is cover key operational items before going into the live Q&A period.
So first off is our REFRESH 1 trial and as most of you recall, this is a 40 patient 8 center study, evaluating the safety and efficacy of intra-operative use of CytoSorb in a heart lung machine during complex cardiac surgery and elective non emergent cardiac surgery that is expected to last longer than three hours. This includes things like aortic reconstruction, cabbage reduce, multiple valve replacements, congenital defect repair and other types of complex cardiac surgeries.
The primary endpoints of the study are safety, and the reduction of plasma free hemoglobin that can cause post-operative complications. Plasma free hemoglobin is a result of hemolysis of blood, as the blood coursing through the artificial blood circuit. It is also caused by cardiatomy suction under negative pressure red blood cells will explode or release the contents of those red blood cells, which is free hemoglobin.
And is also caused by the administration of blood transfusion products, particularly pack red blood cells that have typically life starting storage, and add a burden of free hemoglobin to the patient.
Free hemoglobin as you recall is very toxic. Because not only is the iron radical -- the iron ion in hemoglobin very toxic causing the formation of oxygen radicals that can damage blood vessels and tissues, but it is also very potent scavenger of nitric oxide, the body’s most prevalent base dilator that causes blood vessels to dilate and blood to flow throughout the body. But that nitric oxide present, patients following surgery will often suffer from decreased blood flow either to the lungs, to the intestine, to the kidneys and other vital organs, potentially leading to organ dysfunction, organ failure following the surgery.
So in this trial, we are working with eight major cardiac surgery centers, including Baylor and Texas Heart Institute, [indiscernible] Medical Center Columbia University, Cooper University Hospital, University of Kentucky, University of Maryland, as well as the University of Pennsylvania and the University of Pittsburgh Medical Center.
In May, we reported that the Data Safety Monitoring Board, the DSMB analyze safety data from the first 24 patients and found no safety concerns and recommended completion of the trial.
We are currently nearly complete with our enrollment, with 44 patients enrolled to target a total of 40 patients, who have completed all aspects of the trial. We expect to announce top-line data during the EACS conference. The European Association of Cardio-thoracic Surgery Conference in Barcelona at the beginning of October. Depending of the successful completion of REFRESH 1 and agreement with the FDA we expect to begin a pivotal registration refresh two trial early next year.
A second update is with Fresenius Medical Care. Back in December of 2014 we entered into a multi-year partnership with Fresenius the world’s largest dialysis company for exclusive distribution of CytoSorb in critical care applications in France, Poland, Denmark, Norway, Sweden and Finland. And as Fresenius has mentioned CytoSorb is a key part of their growth strategy in critical care and Fresenius has committed to annual minimum purchases to maintain this exclusivity.
This relationship leverages Fresenius critical care leadership and industry leading sales force and distribution to bring CytoSorb to patients and physicians throughout these territories in the future. And partnership also has a potential for broader future synergy and expansion as well given that Fresenius is one of the leading producer of dialysis machines that are found in hospital worldwide and are also the leading producer of disposable blood purification products as well. You can imagine how CytoSorb fits well into their business model.
As Kathy mentioned in May Fresenius launch CytoSorb with a 30% sales force in the intensive care unit in the six countries and these sales people are also selling Fresenius products. So Fresenius is actively marketing and selling CytoSorb in its market countries now and has a busy schedule in actively promoting CytoSorb in upcoming critical care conferences. And in this picture this is just one of a number of places where CytoSorb is being exhibited in the Fresenius boots with the Fresenius dialysis machine such as the Fresenius multiFiltrate Pro which is Fresenius latest dialysis machine pictured here in this figure.
In addition they have also developed a wide range of marketing collateral including this nine page product broacher, which you see four pages here. And this is what their sales force is currently using to bring CytoSorb to their clients in these countries.
Now a quick update on Biocon. Biocon again is the largest biopharmaceutical company in India. They were selling carbapenem class [ph] antibiotics to treat primary infections in the intensive care unit and now we are combining the treatment of infection with the treatment of the massive inflammatory response with CytoSorb to have what we believe is the most comprehensive treatment for sepsis today.
So they have seen significant growth in India with now expansion into Sri Lanka, and are currently funding and conducting the first investigator initiate study in India using CytoSorb and sepsis patients. They have also established a separate sales division to focus specifically on all aspects of CytoSorb market development and sales and in the next couple of months we’ll be embarking on yet another key opinion leader speaker series in India where they are bringing key opinion leaders from throughout the world who have experience with CytoSorb to educate and talk about how to use CytoSorb best amongst their various clients in India.
On the next slide we are also proud to announce that we now have had more than $18 million in government support towards the development of our technology. And on the next slide this includes the most recently announced potassium binding polymer grants that we announced yesterday. So we were recently awarded a total of approximately $650,000 in SBIR contracts to continued development of novel potassium binding polymers and this includes roughly $500,000 Phase II enhancement increasing our previous $1.15 million U.S. Army Phase I and Phase II SBIR contract to develop polymers to treat patients with burn and traumatic injuries.
And this also includes a new brand from the defense health agency, which is a $150,000 Phase I SBIR contract also to treat hyperkalemia. Now the goal of these programs is to develop rapid treatments for severe hyperkalemia that can kill wounded war fighters and civilians suffering from severe trauma burn injury, massive blood transfusions, kidney failure and other conditions. And on the right hand side you can see a number of EKGs, the first strip on top is normal sinus rhythm this is what hopefully all of us on the phone today have in terms of regulatory beating heart, but with the rise in potassium can lead to failed cardiac arrhythmias and here you’re beginning to see science of high levels of potassium, which include keyways in the second EKG.
But that can rapidly deteriorate into life-threatening ventricular tachycardia seen in the green strip and then ventricular fibrillation, which is the non-productive contraction, random contraction of the ventricles of the heart and that of course can then lead to sudden cardiac arrest and [indiscernible] sudden stopping of the heart and ultimately death in the patient seen in the last EKG below.
So this program represents a new product category for the company and takes advantage of our polymers massive porosity and surface area and potassium binding chemistry to directly bind and remove potassium in blood and although dialysis has been considered the definitive treatment for potassium.
These polymers may actually be better suited in diseases like in conditions like severe burn injury and severe trauma due to their faster kinetics, the ease of treatment and importantly the ability to reduce cytokines, myoglobin and other toxins that are generated during trauma and burn injury that standard hemo dialysis cannot remove.
And so just as the final point here there is a company called Relypsa that was a NASDAQ traded company that was just acquired by the Switzerland based Galenica for $1.5 billion for, solely for its recently FDA approved orally administered potassium binding resin Veltassa now this is a resin that was designed to treat mild to moderate hyperkalemia that is often seen in dialysis patients it is not intended for the treatment of life-threatening severe hyperkalemia, but I think it provides a very interesting comparable for our potassium binding polymer technology.
Now on the next slide is a pitch to basically ask you to visit our CytoSorb.com website for the case of the week. Now again this is a serious that has had excellent feedback from both physicians and investors on the many exciting case reports presented on our website. And these cases highlight the ongoing successes that clinicians continue to have as they treat earlier and more aggressively. And our goal using these reports is to broadly teach our users how and when the therapy is being used most effectively, as well as to give investors an idea of how CytoSorb is broadly being used in the marketplace today.
Now there are two case reports that I wanted to share with you, one is the most recent case report that you can read more about on the website. But this is a patient who developed septic shock from a urinary tract infection and this was a 75 year old man with a history of surgery urinated tract cancer, who developed a urinary tract infection after replacement of ureteral stent designed to conduct urine from the ureters to outside of the body through a urostomia as you can see in the lower picture.
So this patient was got very sick following the replacement of this catheter and he was diagnosed with an e-coli infection and despite broad spectrum antibiotics rapidly developed septic shock with severe hypotension and a lactate of 14.3 milliliters per liter indicating severe dis-efficiency in blood flow to the rest of his body, to the point where his body was no longer undergoing oxygen derived respiration but was actually undergoing anabolic glycolosis producing lots of lactate meaning his tissues were not getting enough oxygen. And basically this required multiple ways of [indiscernible] including noradrenaline and [indiscernible] and he had to undergo renal replacement therapy or dialysis, essentially dialysis.
So this patient was extremely unstable and that’s when they initiated treatment with CytoSorb for total 30 hours, but what happened was that it resulted in a significant stabilization of the blood pressure with the waning of dobutamin after three hours and 50% reduction of epinephrine in 24 hours. His lactate was halved in 10 hours and returned to normal after 24 hours suggesting a restoration of adequate blood pressure and blood flow to his vital organs as well as peripheral tissues.
This patient was eventually whined off renal replacement therapy and mechanical ventilation within six days of CytoSorb treatment and was transferred to a normal hospital ward two weeks after CytoSorb treatment and went on to make a full recovery.
The second case report is something that was just published in the Journal of Artificial Organs last month. And this is a patient with swine flu as well as a specific variant a staffed pneumonia called PVL staff pneumonia. Now the reason why I includes this case is because this is a case that I think most people on this call can relate to. Now this was a previous healthy 33 year old woman who was five months after giving birth. And this could have been your granddaughter, your daughter, your sister, your niece. And she presented with a four day history of flu like symptoms just out of the blue. And basically went to the hospital with symptoms of breathlessness, confusion as well as chest pain and abdominal pain.
And on ICU admission she was diagnosed with swine flu complicated by a very severe secondary bacterial pneumonia with heavy growth of a [indiscernible] leukocyte positive staphorius [ph] infection. Now PVL which is what this toxin is called is poor forming toxin roughly 34 kildons in size. So that means that is lying right in the middle of the size spectrum that CytoSorb removes -- can remove from blood. And this PVL toxin is known for causing a necrotizing pneumonia just a rapid destruction of tissue and the tissue architecture resulting in abases formation and cavitation of organs and a destruction of white blood cells that is typically fatal in up to 75% of cases.
And once you presented she had profound acute respiratory distress syndrome, which is one of the worst forms of lung injury. She also had severe heart failure with the very low ejection fraction so her heart was not squeezing well at all. And she required high amounts of three different types of vasopressors. She also had marked neutropenia or very low white blood cell counts so she had an inability to really clear the infection because of this toxin destroying her white blood sales and she also developed a serious lactic acid doses with a low production of urine requiring essentially a hemo-dialysis type treatment.
Despite antibiotics and despite using renal arterial VA ecmo which is a way to oxygenate blood outside of the body as well as provide circulatory support to the body the patient’s condition did not improve. And you can see that on the graph to the right. CytoSorb was then added two hours after the institution of VA ECMO and what you can see their after continuation of the therapy for about 24 hours. You can see a very rapid reduction in the need for vasopressors and this is really the surrogate indicator for hemodynamic stability in this patient.
And she was completely wind off all pervasive pressers within 24 hours. And the investigators here also added on IVIG Interveneous Immunoglobin as well as clinomysin [ph] as a way to help further turn off production of this toxin while CytoSorb was removing the toxin. This patient in the treat follow-up she ultimately went onto recover with normal heart function and some residual lung dysfunction in a two months follow-up following her discharge.
But suffice it to say I think if not for the heroic efforts of her physicians and if not for the availability of really next generation advanced products to treatment sepsis like CytoSorb, it's probably safe to say that this woman would have died. And so we're very proud to have had a role in helping this woman survive.
So with that I’d like to conclude with our outlook for the second half of 2016. As we’ve said before CytoSorbents has not historically given financial guidance on quarterly results until the quarter has been completed. However, we currently expect a strong second half of 2016 with the achievement of numerous operating milestones. In addition we fully expect that the second half of 2015 CytoSorb sales, as well as total revenue will exceed those in the first half of 2016.
So with that that concludes our current prepared remarks, and now I would like to open it up to a live Q&A session. Amy?
Thank you Dr. Chan. Operator we're ready to pull for questions.
Thank you. [Operator Instructions] We’ll take our first question from Jason Kolbert with Maxim Group. Go ahead.
Hi, guys. This is Gabrielle [ph] for Jason.
Congratulations on a solid quarter. We are really excited for the growth. So I have couple of questions here. The first one is, what are the criteria you put in place when you sign up distributor? And how do you set the benchmark goal and how you measure the performance of distributor? Thank you.
Sure. That’s a good question. We seek distributors who has extensive experience in critical care sales. They also typically are required to have experience in some type of extra-corporal life support, whether or not it be dialysis, chemo filtration, ECMO or other types of apheresis type technologies.
We are looking for committed partners that are typically have a well-balanced portfolio, that potentially have synergistic product portfolio with CytoSorb, but also have a manageable portfolio, where they can commit to the type of attention that we would expect from them to sell CytoSorb into the marketplace.
Now all of our distributor agreements come with exclusivity for their particular territories, but they also come with expectations on minimum purchases of CytoSorb in order to maintain exclusivity. And we follow our distributors on a very regular basis to make sure that they are achieving their goals. We support them extensively with marketing materials with clinical data, with reimbursement support most recently, and other types of support, as well as training of distributors on a regular basis. In order to make sure that, they are bringing the latest and greatest knowledge of how to use CytoSorb best to their customers in their territories.
And so we track our distributors and their orders on a regular basis. And that is one of the main ways that we follow them.
Okay, great. So can you walk me through what it takes to reach the critical mass in Europe. And at what point the use of CytoSorb become a routine modality? And how many KOLs needs to adopt the product for it to become the mainstream product in the marketplace? Does it make sense for us to be tracking the KOL adoption at this point?
Yes. So we used to use KOL adoption as kind of a benchmark for interest in CytoSorb sales. But since -- but as of probably more than a year to two years ago we stopped doing that, because the number of KOLs has become too numerous for us to count.
And as our awareness -- as the awareness of CytoSorb has expanded throughout the marketplace. There are just so many people thinking about how to use CytoSorb in clinical usage that we can’t keep track of them all. There are literally thousands of intensivist throughout the European Union and throughout the world. And what -- how we are trying to keep track of them are buy key accounts, and by in our direct sales territories of Germany, Austria and Switzerland. And through distributor sales and distributor reports, on their activities in various different countries.
So in terms of becoming standard-of-care, clearly that is our goal. And I’m pleased to say to-date that, there are number of hospitals already, particularly in our direct territories that have adopted CytoSorb as the fact of standard-of-care for the treatment of a number of different illnesses.
Based upon their successes that they have seen already using this amongst many such patients in their hospitals. So even without having large scale pivotal studies, large scale randomized controlled studies demonstrating the benefit of CytoSorb in these particularly applications. They’ve seen it work in their own hands, and I think that is ultimately what has been the most convincing in terms of bringing this to become standard-of-core in these hospitals. So of those hospitals they include many of the major university hospitals and public hospitals in Germany and we expect that number will continue to grow in the future.
Great. So can we now switch gear to the U.S. trial. So what are the next regulatory steps for you to move forward the refresh trial?
So we are looking to do a soft lock on our database after the last patient is enrolled and we expect the last patient to enrolled within the next couple of weeks. We anticipate an analysis of these data and announcement of top-line data as I mentioned that the EX Conference at the beginning of October. But we also plan on doing a much more extensive analysis of the data and are looking to go the FDA most likely in the fourth quarter of this year and with the goal of negotiating and discussing the path for the refreshed queue, registration trial.
And as we mentioned I think the FDA is waiting for our data from this REFRESH 1 safety and feasibility study before opining upon the exact path for regulatory approval. But it could be De Novo 510(k) path as a free hemoglobin filter for example or could be the traditional PMA path which we expect to be the default pathway in a much larger trial roughly 300 to 400 patients where we would be looking at clinical outcomes such as the need for vasopressors, days in the intensive care unit, timeline the ventilator as endpoints for that registration trial.
Okay, great. Thank you, Phil again congratulations.
Thanks very much, Gabriel.
And we'll take our next question from Sean Lee with HC Wainwright.
Hi, Phil and Kathy. Congratulation on the strong quarter and thank you for taking my questions. I might have missed this earlier, but how do you [indiscernible] would there be any [indiscernible] in the near future?
I'm sorry Sean. If you could repeat the question. I think.
[indiscernible] manufacturing capacity handling [indiscernible] increase demand from low distributors would you be supply constraint at any time in the near-term?
Yes, I can certainly let Vince talk to that point. But currently we believe that we have enough capacity particularly with improvements in manufacturing that we’ve had recently to be able to supply demand for the next one to two years. Maybe Vince you like to give a little bit more color.
Sure. Hi, Sean. So basically as Phil mentioned we are continuing to do a number of operational improvements at this and to actually increase the capacity that we have in the current location and to Phil’s point we believe that we have adequate capacity to go out the next one to two years. We also have obviously put in contingency plans on our own planning should that volume increase significantly how to essentially duplicate what we have here in another location if we had to do that to double the capacity for instance. So I think it’s safe to say from the next one to two years we have enough capacity.
Great to hear. Second question is on the recently launched distributors, which ones are contributing already to the second quarter number and which one do we expect to come online during third quarter or will see in the next quarter’s numbers?
Kathie, did you want to take that?
Yes, sure. So we said we are in 37 countries and like we were able to -- if we just look at our slide on the countries of those 37 countries we currently have I think it's 28 to contributing to revenue, that doesn't mean Sean that they necessarily contributed to Q2 revenue, but most of them have but they contributed to revenue through June 30, 2016.
I see. Thank you for the clarity. That’s all I have.
[Operator Instructions]. We'll go next to Andrew D’Silva with Merriman Capital.
Hey, good afternoon guys. Thanks for taking my call just a couple of quick questions. First off could you elaborate on where there any large stocking orders during the quarter that could have distorted the Q2 results or where that fairly in line with previous quarters from a stocking standpoint?
Yes I think it was fairly inline from previous quarters from a stocking standpoint. We believe that the growth that was exhibited in Q2 was fairly organic in nature and expect that trend to continue going forward.
Thank you for that. And as far as initiatives go [indiscernible] are you getting updates from them on the progress out of their sales team. And then as far…
I'm sorry Mr. D'Silva you are cutting out.
Can you hear me okay?
Yes we can hear you now Andy.
My apologies. Yes I'm just trying to get a sense on how often you are betting updates from the sales team at Fresenius? And then [indiscernible] and they're willing of CytoSorb when they're in the market.
Could you just repeat that you cut out there for a second there Andy. Could you just repeat that second part of the question so first part of your question was have you been getting regular updates from partners like Fresenius and then the second question was?
Yes do you feel like they're up to speed on the product? And is their willingness to upsell there and is it charting your expectations right now?
Sure. So why don’t I turn it over to Chris Cramer our VP of Business Development who has work very closely with Stefan Baudis our International Sales Director on these particular accounts. And Chris would you like to give some color on that?
Sure thanks so, hi Andy this is Chris. I think to your first question we see in very first close contact with all of our partners and distributors. We typically meet with them or talk to them on the phone at least once every two weeks. For Fresenius in particular as Phil has mentioned the focus for them has really been on selling activities across all countries. And so today they’re actively promoting CytoSorb throughout the territory.
Just to give you a sense of some of the success stories they've had and there has been a couple I can just kind a give you a few here. But and so for example in Finland they’ve recently conducted what they call Scandinavian ICU days where they bringing physicians from all across Scandinavia to talk about new therapies. And CytoSorb was a key focus there. Subsequent to that they had four centers that were trained on CytoSorb and they had their first patient treated in early July.
And the patient there was e-coli sepsis and the feedback from the doctors there, the ICU doctors was that they were very satisfied and impressed with how quickly the treatment helps. And so obviously that was a very positive. And in that case we’re hoping to get a case report back from that treatment.
Then in Poland, Poland as you may recall was one of the first FMC countries to record CytoSorb sales and they've been off to a fast start there. Recently they've offered CytoSorb in a tender and so we're hoping to hear more about that I think that's positive news. So just to bring some color to some of the activity going on with FMC I hope that helps. And we're hoping to have more of these kind of success stories to have for future calls.
So basically you guys are fairly happy with the way things are charting right now with Fresenius it’s on path with your expectations.
Yes absolutely, I think that we've seen from them a tremendous amount of commitment and resources going towards the launch of this product and we have full confidence in their team. As Chris mentioned we are in contact with them very frequently after during the launch. I think Chris was talking with them much more frequently than once every couple of weeks. But they participated in our training, they participated in our users meeting. We had a program of training of the trainer so that we can get the most recent data out to them and they’ve been a very committed partner and full of confident that they we’ll be able to have success in those countries.
Got it, great, well thank you for answering my questions and good luck for the rest of the year.
Sure Andy, thanks very much.
And we’ll take our next question from Brian Marckx with Zacks Investment Research.
Hi guys nice quarter. Kathleen a couple for you product margin as you mentioned was up quite a bit just wondered if you talk about that you mentioned product mix had something to do with that, can you just address that? And then with the additional territories coming on that are obviously distributors does that affect gross margin at all?
Yes okay Brian. So to the first part about product mix, so our gross margin was improved over prior quarters. Large percentage of that was due to direct sales that was further impacted by just the mix of sales among the distributors we do have different pricing in different countries. So it happened to be that way we’re not predicting, if that will be what we experience necessarily in the future.
And then in terms of distributors, direct sales have been primary driver however there will come a time when distributor sales which are of course at a low margin than direct sales generally, may overtake direct sales and that all other things being equal might impact gross profit margins I will say though that we have been really successful even out of our facility here in changing and improving our operations to try to reduce our cost per device. In fact this year our standard cost probably about 10% to 15% lower than what they were last year and we expect to achieve continual improvement. So that should boost the margins a bit.
Yes and maybe to give a little bit more color, as we gain volume and as we gain manufacture efficiencies and particularly as we move to a larger plant right now we were staying in the current plant because we have a nice runway here in terms of product production, but as we move to the larger plant which is plant in the planning and will happen in the future. We expect to gain additional economies of scale and manufacturing efficiencies.
So although the blended gross margin for this quarter was 68%, we believe that even overtime based on just a variety of different factors that we can drive the direct gross margin to greater than 80% and the blended gross margin therefore with it. But the quarter-to-quarter blended gross margin is of course a mix between higher margin, direct sales and lower margin distributor and partner sales and depending on what that mix looks like it will have a quarter-to-quarter variance in terms of the overall gross margin.
Got you. Okay, that makes sense. In terms of the revenue growth recently is it possible to kind of quantify how much of that revenue growth is coming from your direct sales territories versus the new territories that came on line? Yes actually I didn’t say that right is what I’m looking for is it possible to quantify how much of the recent growth is coming from reorders which is probably most of your direct sales anyway versus the new territories that came or new accounts in general I guess.
Kathy, would you want to comment?
Yes so Brian in any given quarter probably 80% to 90% of our sales are coming from the repeat orders or reorders from existing hospitals or distributors.
Okay, alright. And then I guess it’s fair to say based on the new territories that are coming on line fairly rapidly it sounds like in particularly or maybe particularly with Fresenius at least in addition to other territories, that mix may change a little bit at least, I guess here in the near-term, is that fair to say?
Yes, I think that’s within the realm of possibility. But what we are seeing when you look at the numbers is particularly in our direct sales territories, that started -- where we started commercialization full year earlier than any other territory throughout the world. We’re really seeing that momentum build. And so we expect direct sales to continue to be a major contributor of our revenue going forward.
Okay. So if we can talk about refresh just a little bit. It sounds like you are targeting 44 total patients for a 40 patient clinical set. Does that mean that you have 36 that are enrolled right now? Or is there may be a patient cushion or two there?
No. In fact, we have enrolled above the 40 patient targets. So we now have enrolled 44 patients total into the REFRESH 1 trial. We have the ability to go up to approximately 52 or so patients in the study.
But let me explain that for a minute, because it maybe unclear. When patients are enrolled into the study, they are rolled based on the expectation that of course they’ll complete the study, but also based on the estimation of the physician on particularly how long the patient will be on cardio pulmonary bypass, and on the operating room table. And so -- and they make this estimation based upon the typically the complexity of the cardiac surgery procedure.
Now we have criteria for example in our study that patients are expected to be on cardio pulmonary bypass for longer than three hours with minimum amount of cardio pulmonary bypass required. Sometimes the surgery goes extremely smoothly and the patients are for whatever reason the operation doesn’t take as long as expected, and patients don’t achieve that minimum time requirement on cardio pulmonary bypass. That’s just one example for why a patient would potentially not complete or not be -- not complete the study, because of missing that endpoint.
So there are factors like this that happen all the time in trials, which is one of the reasons why we’re over enrolling in order to account for those patients that don’t meet the full criteria of the study.
Okay. So in terms of when you think -- I think you said that you think that maybe in the next few weeks, maybe fully enrolled. It sounds like, there has been a little bit of delay relative to initial expectation. So if you can kind of just talk about what the differences between I guess, initial expectation? And then how it’s just been delayed a little bit? And kind of what was behind that?
I don’t think that there was any delay. I think our -- what we have guided has been that we would finish the trial mid-year. And I think that, we’re on pace to do that. I think our goal is to try to get the data ready for presentation at or at least to talk about during the EX Conference in early October. And that is our interim goal.
But I think that when you have a study, you expect to start off with eight centers or you expect to start off with all your centers right away. But practically speaking that doesn’t happen and for whatever reason, particularly contract negotiations between a clinical site and the company in any study is always complicated, and that takes time. And sometimes, there are delays, when study sites enroll, our last study center that came on board is the second top enroller in the study.
So it is a -- things can turn around very quickly.
So kind of more administrative stuff than really anything fundamental to the actual design of the trial, I guess or anything related to that, is that fair to say?
Yes, that is fair to say. I think that we expect that in a fully staffed and with all the clinical sites onboard that this study can enroll extremely quickly. The patient population is there, we are not dealing with esoteric patients, we are dealing with what it amounts to 20% to 25% of the overall cardiac surgeries that are occurring every year in the United States. These are the complex cardiac surgery procedures. So there is 100,000 to 150,000 let's say of these types of surgeries that are happening every single year in the U.S.
Okay, great. Thanks a lot, I appreciate it guys.
Sure. Thanks, Brian.
We'll now take our next question from Jonathan Aschoff with Brean Capital.
Hi, guys. Congrats on the strong quarter. I was wondering what are your top at least let's say five or so distributor countries for sales to-date, can you give us that?
We haven't disclosed to-date, Jonathan and I apologize. But I think that when you look at our territories the one just started first are typically the ones that are the strongest because they have had more time in the marketplace to gain market awareness of the product and to gain customers support and other things. And so we do see that time plays a very important factor in productivity.
Okay. More so than the size of the market in that country, at least now, correct?
At least now, but I think that we have very large expectations for countries like India, Russia that are -- Russia is a big believer in blood purification for example. Even Vietnam have started recently that is another territory that has a lot promise, Middle East and others. So it is a combination of both.
Okay. And just to be clear, there wasn’t some large initial shipment to Fresenius that was a factor in the strong second quarter. Is that true there was or there wasn't?
There was not, Fresenius had bought ahead of the launch as you would expect them to do and we do expect them to be contributors in the quarters coming up.
Okay. So clearly the better margins are driven by direct sales in second quarter?
That is correct.
And how could refresh succeed in of itself yet not inform how to proceed there after at least in the eyes of the regulators?
Could you just repeat that one more time please?
Yes, how could the trial that you are running right now succeed in and of itself but yet in the eyes of the regulators not be informative enough to allow you to proceed as you wish to proceed after this trial concludes?
It's interesting the randomized controlled studies that are ongoing or that have completed in Europe including for example, the one in Medical University of Vienna, the University of Hamburg-Eppendorf as well as the University of Cologne and others. Those trials have focused predominantly on the mid -- on the mild to moderate risk cardiac surgery patients by necessity. I think their ethics committees using new product in cardiac surgery they wanted to establish safety and feasibility in a lower risk patient population.
So REFRESH 1 is actually one of the first randomized controlled studies, in fact probably the first randomized controlled study that is looking at the use of CytoSorb in this high risk cardiac surgery patient population, where the event rate is for example, kidney injury is expected to be in the 30 plus percent range for example. And where the incidence of adverse events such as post-operative circulatory collapse, respiratory failure and other adverse events are quite high. So, so far as of the analysis of the DSMB in May that the device has been safe and in this procedure and if the -- and the primary endpoint again of the feasibility safety study is safety.
And if it shows to be safe we expect then it will provide the evidence needed for clinicians throughout the world to use this in their complex cardiac serving patients where CytoSorb is expected to have the most profound benefit.
So I think that's very important. And regardless of what happens in refresh and what whatever the FDA says that safety data will be very important. Because there are a lot of key questions that are being asked about safety and again REFRESH 1 is designed to look at an answer those questions.
Now in the area of free hemoglobin reduction. This study was never designed to look at statistically significant reductions in free hemoglobin but the FDA and that was designed for pivotal study potentially the De Novo 510(k) study. But what the FDA is looking at the free hemoglobin levels for we believe and what we discussed with them is that they want to know that in this specific patient population where that we've defined through our inclusion and exclusion criteria that this specific patient population is having a problem with free hemoglobin and that will be evident in the control arm data for free hemoglobin after all the data analyzed.
So that will provide a data point for the FDA to say yes, this is the appropriate population this is where we've known for a long time that free hemoglobin is a problem, we’ve never had a technology that could remove free hemoglobin before and -- but that this patient population is now validate it. And so I think that is the -- that is what the FDA is looking for going into REFRESH 2. They’re primarily looking at safety, but they are looking at this free hemoglobin endpoint to make sure that we're not barking up at the wrong tree and we're not doing a futile trial right.
Okay, thank you Phil.
And we'll now take a question from Steve Brozak with WBB Securities.
Yes, hello this is [indiscernible] on for Steve Brozak. How are you all doing?
Hi, how are you?
Good. Just have a couple of quick questions, regarding your FMC partnerships, to what degree did your direct to consumer -- your direct sales experience help inform their launch in the processes there?
Yes I think Fresenius has known about our technology for many, many years and has following along with our market launch in Germany. As you know Fresenius is based out of Germany. And their people have been watching how CytoSorb has been rolling out. Obviously they had key contacts with all the -- most of the major key opinion leaders throughout Germany. And so they've been hearing how CytoSorb has been doing. And I think that has contributed to the establishment of this partnership and contributed to their expectations of what CytoSorb could do in their hands in their countries.
So we clearly have not been leaving things to chance, I mean our goal is to make sure that has to do whatever we need to do to ensure that they're successful. And so there has been an ongoing dialog and ongoing transfer of information discussions with our sales team and et cetera to ensure that they have what they need to be successful. What I would say is that this is not the first time that their sales people have heard about cytokine reduction to treat clinical illnesses. Fresenius actually has a product called EMiC 2 Ultraflux, which is a high molecularly cut off filter that they had introduced a number of years ago as a technology to try to remove cytokines.
But I think this is a very similar technology to SepteX by Gambro, but SepteX is not seeing much anymore in the critical care space. And the reason for that we believe is because it was not effective. And I think Fresenius partnership with us is I think a nod to our technology as a potentially superior technology.
Okay, thank you for that. And I'm going to go back to something that was stated earlier in the presentation. The user conference that you had, it was mentioned that Fresenius was actually in attendance there. Could you tell us a little bit about the user conference? And because the bite of and the sort of roll out, a lot of it is contingent upon feedback from users and physicians. And so that it will be interesting to hear about the conference that you guys just hosted.
And then any discussions you’ve had with FMC on how to -- have you had any discussions with them to expand the conference? Or how they can contribute or help to promote the conferences more detail?
Sure, so in terms of our direct marketing effort, we held our third international CytoSorb users meeting in Brussels at the ISICEM Conference in March. And that was a third conference in roughly a year and half. And this particular conference brought in approximately 107 people from I believe 23 companies from around the world to discuss their experiences with CytoSorb and to share information on help us to treat.
Now Fresenius sent 18 representatives to that conference. And so -- and I think this is a working conference, where there is a lot of open discussion, there is a lot of presentation of data. And I think Fresenius, I believe got a good feel on how CytoSorb was being used today.
But that I think belies the more than 1,400 human treatments that have now been performed with CytoSorb, only a fraction of those are actually presented at this conference. And there is always more to learn, more to teach. And so I think we expect Fresenius to be active participants going forward in those conferences. But what I would also note is that, we have been participants in their conferences that they have held in critical care meetings as well.
And at their invitation, our key opinion leaders and our people have been present there, been present in there booth device, in their booth et cetera to help support their marketing efforts. So I think all that is -- there is a good give and take between Fresenius and CytoSorbents. And we expect that to continue.
Okay. Well, thank you for taking my call.
Sure. Absolutely. Thank you.
At this time, I’d like to turn it back to management for any additional or closing remarks.
Well, thank you very much everyone for taking the time today to get on the call. And we certainly appreciate your participation. If you do have any other questions, as usual please feel free to reach out to Amy Vogel at email@example.com and we will try to get answers to your question where possible. Thank you very much, everyone, and have a good evening. Good night.
Thank you. That concludes our conference for today. I would like to thank everyone for their participation. Have a lovely evening.