Cesca Therapeutics Inc. (KOOL) Q4 2018 Earnings Conference Call March 25, 2019 4:30 PM ET
Paula Schwartz - Managing Director, Rx Communications
Chris Xu - Chairman and Chief Executive Officer
Jeff Cauble - Principal Accounting Officer
Conference Call Participants
Swayampakula Ramakanth - H.C. Wainwright & Co.
Good day, and welcome to the Cesca Therapeutics Conference Call and Webcast to Review Financial and Operating Results for the Fiscal Year Ended December 31, 2018. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions]. As a reminder, today’s conference call is being recorded.
At this time, I’d like to turn the conference call over to your host, Paula Schwartz of Rx Communications. Please go ahead.
Thank you, operator. This conference call contains forward-looking statements within the meaning of the Federal Securities Laws. The company’s actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that might cause actual results to differ materially from those in the forward-looking statements is contained in the company’s periodic reports filed with the Securities and Exchange Commission.
The information provided or presented rather today is time-sensitive and is accurate only as of the date of this conference call, March, 25, 2019. If any portion of this call is being rebroadcast, retransmitted, or redistributed at a later date, Cesca will not be reviewing or updating this material.
Participating on today’s call are Dr. Chris Xu, Chief Executive Officer; and Jeff Cauble, Principal Accounting Officer.
And with that, let me turn the call over to Chris. Please go ahead.
Thank you, Paula, and thank you to those of you who are joining us today on the live call via webcast. We had a very busy fourth quarter and productive start to 2019. I’d like to begin by providing a strategic update, then I will highlight some of the progress we’ve made with our product portfolio. I will then turn it over to Jeff, who will review our financial results.
One of our most important accomplishments during the fourth quarter, which took effect on January 1, 2019 was the completion of reorganization and the share exchange agreement that enabled us to increase our ownership of ThermoGenesis from 80% to a full 100% stake. As a result of this reorg, ThermoGenesis is now a wholly-owned subsidiary of Cesca.
The new arrangement was accomplished through our acquisition of Bay City Capital’s remaining 20% equity shares of ThermoGenesis Corp. which Bay City exchanged for a 20% ownership, a newly created subsidiary of ThermoGenesis called CARTXpress Bio. ThermoGenesis owns the remaining 80% of the CARTXpress Bio. This follows only slightly more than six months after the May of 2018 launch of the CAR-TXpress system.
More broadly, ThermoGenesis mission is to develop and commercialize automated medical devices and technologies for cell-based therapies. This includes stem cell banking, point-of-care applications and large-scale cellular manufacturing of immunotherapy drugs, including chimeric antigen receptor t-cells or the CAR-T cells.
CARTXpress Bio is solely focusing on the further development and commercialization of the most recently launched CAR-TXpress technology platform, while ThermoGenesis is focused on developing and commercializing the CAR-TXpress proprietary automation platform in addition to the development and commercialization of AutoXpress, or AXP and POCXpress.
As a reminder, AutoXpress is used for stem cell banking and storage, and POCXpress, as its name indicates, is focused on the point-of-care application of autologous cells for various clinical applications. This restructuring moves us one step closer to meeting our goal of being a key player in supporting all cellular processing needs of the ever-growing cell-based therapeutic market.
Today, we are clearly defying ourselves as having a medical device division and a clinical division. One of our highest priority is to explore options for how we can most effectively realize the value of ThermoGenesis asset and capitalize on the execution of its strategy for shareholders.
In the meantime, let me report on the tangible progress ThermoGenesis made in the fourth quarter. Our continuous goal is to increase the visibility and acceptance of ThermoGenesis in the cell therapy market and become the partner of choice for CAR-T researchers and manufacturers.
As you may know, the CAR-TXpress platform is a robust and modular closed system that addresses the unmet need for large-scale manufacturing for cell-based therapeutics, especially for chimeric antigen t-cells, or CAR-T therapies for cancer. It uses our revolutionary buoyancy-activated cell sorting or BACS technology to dramatically reduce cell processing time, while providing high cell recovery, better cell viability and overall efficiency.
We think this is a dramatic improvement over as their current method of ficoll-based and magnetic-beads based CAR-T cell manufacturing, and we continue to educate our target market on CAR-TXpress platform’s ability to improve t-cell isolation, purification and activation time on that point from eight hours to merely two.
As an example of the challenges we can help resolve, last summer, the European Commission declined the recommended government coverage for two of a major pharmaceutical companies’ CAR-T gene therapy to treat to aggressive form of blood cancer due to cost.
The U.S. list price for that drug is 373,000. In stating its rationale, the National Health Service, a knowledge, the exciting potential to treat very difficult cancers, but noticed that the cost per patient was not justifiable. In addition, due to the highly personalized nature of this cell-based therapy, the batch-to-batch manufacturing variability remains high.
We think our solution, which allows the automation of key steps in the process will become recognized as providing a key critical advantage for pharmaceutical manufacturers, because besides reducing costs, we can overcome its use related to manufacturing variabilities.
It is because our ability to contribute to the transformation and advancements of this technology that we remain wholly committed to becoming the full service partner of choice in the field of cellular therapy, with a new emphasis on the fast-evolving cancer immunotherapy field.
We continue to receive positive responses from both industry and academia for the CAR-TXpress product line, including the X-LAB and the X-WASH systems. And given the inherited modular design and the flexibility of our system, we believe that CAR-TXpress platform can be easily adopted to use with other gene and stem cell-based therapies.
As a testament to the positive reception of our technology, we have more than 30 large institutions bought or looking to buying our systems, including top research institutes, major pharmaceutical companies and larger CMOs. So the value of this system continues to be appreciated, and it bears reminding that we have accomplished this with limited cell support.
We are now looking to different channels that could help expand our global sales of this revolutionary technology. In other devices area, our next-generation AXP II device received U.S. FDA 510(k) clearance in November. This is a replacement of our market-leading AXP platform that has been broadly used by a leading cord blood banks and stem cell institutes around the world.
We’ll continue to support the advantage of global stem cell industry by launching of new automation technologies. The sales trend for AXP and AXP II product line continues in a positive direction in the fourth quarter. The value of our business model also lies in our multi-pronged approach for extracting values from our assets.
In addition to marketing X-Series products directly to researchers and pharma companies, our work to expand ThermoGenesis technology into contract development and manufacturing service, or CDMO and CMO service will provide another compelling opportunities.
For the co-development model, we believe we would be able to offer developers a cost saving of up to two-thirds, compared to the cost of current products on the market. Through a collaboration with IncoCell Inc, an affiliated company of Boyalife Group, our technology has been used to co-develop humanized CD19 CAR-T therapeutics for the Chinese market.
Today, we provide X-Series kit to IncoCell for using its CDMO operation on an exclusive basis, in exchange for a double-digit percentage of its gross revenue. Such collaboration partnerships helps reduce and mitigate the risk of initial capital investment, while still allows ThermoGenesis to capture the business opportunity in contract development and manufacturing service arena. We will continue to pursue additional CMO, CDMO opportunities in selected markets, including the U.S.
Now, let me outline for you the progress we made towards our goals on the product side. As noted a few moments ago, in November, ThermoGenesis received 510(k) clearance from the FDA for its proprietary AXP II AutoXpress platform for clinical blood banking.
As you may know, our first generation AXP system consistently achieved stem cell recovery rate in excess of 97%, the highest in the industry. The next-generation of AXP II introduced important enhancement to the device, including a dock station and proprietary XpressTRAK software that together represents the biggest advancement in automated cord blood processing in many years.
Our 510(k) clearance will help us support clinical development in the significant market of cell-based therapeutics, particularly in immuno-oncology field, where we already began to play an important role.
As noted on our last quarter call, we filed a Device Master File, or MAF, with the FDA for the X-LAB automated cell processing device. The purpose of this filing is to allow principal investigators to include Cesca’s systems in their IND – in their INDs by giving them the ability to comply with regulatory requirement about disclosure, the processing detail, while we protect our intellectual properties. We plan to maintain a DMF that covers the X-LAB, X-WASH and X-BACS processing cartridge, within which MNC purification and target cell selection activation occurs.
Follow the close of the quarter in the first few months of 2019, our momentum continued. In January, ThermoGenesis announced, it completed a 1,000 square foot in-house clean room and took in-house the assembly of our – of both our cell processing disposables and the automated Control Module and Docking Station device – devices.
Compared to the third-party, this gives us much greater control of over our supply chain and allows us to provide even higher quality products and improve customer service. Equally important, ThermoGenesis is now better equipped to scale its manufacturing rate to keep pace with the rising demand for the X-Series.
Last month, we announced a supply agreement with Orthohealing Center Management. This is an example of how we can support networks of physicians, who want to use – or want to utilize the PXP System. So that they can prepare a precise cell concentrate from autologous bone marrow. In this particular instance, this physician network is providing the benefit of their unique Orthohealing Method to their patients.
We also received clearance for labeling of X-Series Control Module and Docking Station with the top Rheinland mark, which signifies that the CAR-TXpress platform’s X-LAB, X-WASH and PXP System, all have tested – all have been tested and comply with the international standards for electrical safety. And also in February, ThermoGenesis received Health Canada approval for the PXP System for point-of-care harvesting of purified mononuclear cells and platelets from bone – from blood or bone marrow.
From a financial standpoint, we’ll continue to implement cost control measures as needed in keeping with our targets of a 25% reduction in expenses from the beginning of 2019. We anticipate that our diligence attention to cost combines with anticipated revenue growth in 2019 should help to deliver our goal of achieving positive cash flow in 2019.
And now, let me turn the call over to Jeff for the financial report. Jeff?
Thank you, Chris. Net revenues for the year ended December 31, 2018 were $9.7 million, compared with $12.8 million for the year ended December 31, 2017. The decrease in revenues was primarily a result of fewer sales of BioArchive devices and the ending of a royalty payment agreement in the prior year, offset by an increase in CAR-TXpress sales due to the adoption of the technology by new customers.
Gross profit for the year ended December 31, 2018 was $2.2 million, or 23% of net revenue, compared to $5.1 million, or 40% of net revenue for the year ended December 31, 2017. The decrease in gross profit margin was primarily driven by higher overhead costs due to the SynGen acquisition and lower overhead absorption due to reduced procurement. Additionally, the prior year gross margin percentage was higher due to the reversal of inventory reserves for products sold.
Sales and marketing expenses for the year ended December 31, 2018 were $1.4 million, as compared to $1.7 million for the year ended December 31, 2017, a decrease of $300,000, or 20%. The reduction was driven by consultant fees incurred during 2017 for the transition of SynGen operations and a decrease in commissions.
Research and development expenses for the year ended December 31, 2018 were $3 million, compared to $3.4 million for the year ended December 31, 2017, a decrease of $400,000, or 11%. The decrease is driven by a decline in personnel costs due to the June 2018 reorganization.
General and administrative expenses for the year ended December 31, 2018 were $8.3 million, compared to $8.2 million for the year ended December 31, 2017. The slight increase is driven by the loss on disposal of equipment in 2018.
The company incurred non-cash impairment charges of $33.1 million during the year ended December 31, 2018, compared to $300,000 in the year ended December 31, 2017. The charges were the result of the impairment of intangible assets and goodwill relating to the clinical protocols acquired in the acquisition of Totipotent.
For the year ended December 31, 2018, the company reported a net loss attributable to common shareholders of $39.7 million, or $2.16 per share, based on 18.4 million weighted average common shares outstanding. This compares to a net loss of $5.5 million, or $0.55 per share, based on 10 million weighted average common shares outstanding for the year ended December 31, 2017.
At December 31, 2018, the company had cash and cash equivalents totaling $2.4 million, compared to $3.5 million at December 31, 2017.
That concludes our prepared remarks. And now we would like to open the call to your questions. Operator?
Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] And our first question today comes from the H.C. Wainwright location. Please state your name followed by your question or comment.
Sure. Thanks. This is RK from H.C. Wainwright. Chris, couple of quick questions. The first one is, now that you have approval from Health Canada on the PXP System and also you received labeling from the TÜV Rheinland for the X-Series. So what should we kind of think about how the commercial efforts would go in these two geographies? And when would they start becoming meaningful?
Yes. Thanks for the question from RK. And the question is regarding now that we have completed all – completed most of our product launch and – which has been very active in the last 12 months, now that we also have approval in by Health Canada and – as a territory and what we do next to enhance our marketing activities?
And that’s actually the main objective for this year. And based on our past half-year result, as I indicated in the script, that three type of our custom exists – three type of customers exist: one is academia, a large academiac institute; second is large pharma; and the third is, large CMO or CDMO operations.
So with our limited – our marketing efforts, we currently can handle large pharma or those large customers. Historically, the company doesn’t have the sales force that can address the needs from all the research lab across the world, which could easily go beyond more than 100,000 those very actively engaged in cell biology or cell research.
So it’s our intention number one to increase market awareness by presenting academic statins to launch broader campaigns, which may include campaigns in professional journal. But on the other side, we are also very actively looking for partners can help spread this very exciting new technology to other territories. So we want to divide our customers, so that it can be best to elaborate existing channels to promote this technology faster.
Thank you. And then a little bit more color on the reorg and especially trying to have a separate devise division like the ThermoGenesis. So now that you have that. How do we – how should we think about like how those – the product development could happen from here onwards? And when would it be start seeing some of that come through in the U.S.?
Yes, sure. And the whole purpose of separating the device division from clinical division, one of the reason is that, those two different divisions has slightly different business model. Our device division is still heavily engaged on promoting the cells, promoting the use of our device, so it’s a very typical revenue-driven business model. Whereas in the clinical division, our clinical pipeline foreseeing to a pharmaceutical – a very typical pharmaceutical model that it is driven by a milestone-driven business model.
So that’s the fundamental principle behind us allow us, that’s the reason we separate those two divisions. And the immediate, the most recent goes at least for the 2019 and maybe 2019 and 2020 is to unlock the value in those divisions. And we are heavily focused on ThermoGenesis, not only by addressing its market needs by promoting cells, but also looking at how we can best leverage this new structure and unlock the value, which including could include bringing new investments, partners and various other means into this standalone division.
And from a financial report, you can see that starting in 2019, we’ll start segment report that report ThermoGenesis as a standalone device division – and which set us to have the same purpose. And with those results, [ph] we’d really wants to unlock the value and bring values for our shareholders.
Thank you. Thank you, Chris.
[Operator Instructions] Again, ladies and gentlemen, at this time, I’m showing no further questions. I’d like to turn the conference call back over to management for any closing remarks.
Thank you, operator. We look forward to updating you on our progress in the coming weeks and months. And thank you to everyone who participated on today’s call and for your interest in Cesca Therapeutics.
Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.