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Takeaways From A Cantor Fitzgerald Call With PolarityTE Management

|Includes: PolarityTE, Inc. (PTE)

Summary

After Citron's accusations, Cantor Fitzgerald analyst Elemer Piros hosted a call with PolarityTE's management.

We were given a transcript of this call, presented below.

Our main takeaway is that Polarity evidently has no plans to run its own clinical trials, instead depending on independent centers to study SkinTE vs. skin grafts.

The CEO says early results could be available "hopefully within the next year or so".

Following Citron Research's accusations against PolarityTE (NASDAQ:COOL), Cantor Fitzgerald analyst Elemer Piros hosted a call with management. It's worth mentioning Cantor has underwritten multiple Polarity offerings, and currently has a $65 price target on the stock.

As we've noted elsewhere, Citron's accusations were deficient in many ways, and much of this call was spent explaining the patent prosecution process.

However some novel information was presented concerning the "head-to-head" trials mentioned in their latest investor presentation:

Lough describes some of the trial design:

The clinical trial like I said is a split thickness skin graft, compared to SkinTE in the same patient in the same wound so that every patient acts as their own control and you compare that to the native skin. Essentially, the uninjured skin that's around that, with outcomes that look like graft takes, as well as full thickness, hair bearing skin regeneration. That limited market release and also the prospective multi-centered trial, three centers with twelve patients each acting as their own control.

On endpoints:

So outcomes are actually being monitored by these independent centers across these patients. Basically, in simple terms, the comparison of the skin graft, to SkinTE and native skin. We use clinical outcomes criteria related to Vancouver Star scales, profusion using laser doppler imaging, the formation of appendages, hair follicle, sebaceous glands, sweat glands. To actually directly compare that to a split-thickness skin graft, then native skin itself. Those are what those types of outcomes are, from looking at primarily with regards to primary and secondary outcomes.

He speaks more on the timing of data release:

Yeah, absolutely. Just so you know, the three centers are independent and objective. The principal investigators that are actually performing these studies that have begun to enroll patients, and treat patients, move at slightly different speeds. They aggregate data together then, an independent medical monitor actually has the ability then, to review all of that. After that data is aggregated, they will begin to release a potential skin data, based on the earlier time point, essentially a 90-day time point, and then potentially later on again, release data at a longer time point, closer to around a year.

So there may actually be, then, multiple publications that come out of this, but again, that is actually up to the three independent institutions, the three independent IRBs that are actually run the study again, independently.

So I would love to say that hopefully within the next year or so that we will begin to see those early results being published by those groups, and then I'm hoping, following that, there will be another release of publications, material from those providers, from those institutions, on the later term, and the later outcomes that they were evaluating, closer to that one year post-treatment mark.

As far as we know, these sort decentralized of trials could not contribute to registration of SkinTE as a Section 351 HTC/P by the FDA. They could influence doctors and hospitals to support the product so long as the FDA allows it to be sold as a Section 361 HTC/P.

As we mentioned in our previous report, we continue to be highly skeptical SkinTE is a Section 361 HTC/P, and thus exempt from the FDA's pre-market approval requirements.

Full transcript

Michelle:

Welcome to the call with PolarityTE, Incorporated. My name is Michelle, and I will be your operator for today's conference. At this time all participants are in a listen-only mode. Please note that today's conference is being recorded. I will now turn this over to Mr. Elemer Piros. Sir, you may begin.

Elemer Piros:

Yeah. Thank you very much, operator. It is my pleasure to join the Polarity management team to join us on this call. Our main goal is to understand the company's IP and commercialization strategy and its interactions with the US patent office. Our speakers will include Dr. Denver Lough, the inventor of Polarity Squared Technology, who is also Chairman of the Board, President, and CEO of Polarity. We also have Jennifer Burdman who is Chief Intellectual Property Officer and Deputy General Counsel along with Cameron Hoyler who is Chief Legal Officer and General Counsel, Paul Mann, who is the recently-appointed CFO, and Rich Haerle, who is vice president of IR and strategy. Before I get on with my questions I'd like to ask Cameron to make, advise us on forward looking statements.

Cameron Hoyler:

Thank you very much Elemer. I'd like to inform everyone that certain statements made during this call are forward looking statements in the meaning of the Private Securities Litigation Reform Act of 1995. They're generally identified by words such as believe, may, assess, anticipate, intend, plan, build, would, and certain similar expressions. [inaudible] the forward looking statements basis on the companies beliefs and assumptions as of today's date. The company's actual results are just materially due to risk factors and other items decide in more detail in the risk factor section of the company's annual report other filings with the SEC. Subsequent events may cause these forward looking statements to change; the company specifically disclaims any obligation to update or revise the forward looking statements as result of changes in circumstances that occur after today's call, except as required by applicable law. Thank you Elemer.

Elemer Piros:

Thank you. Ready to kick it off. Denver, I have an unconventional question first. Yesterday Polarity had spoke to its very first KOL on the first theories of case studies conducted by a variety of specialists in a variety of settings [inaudible] SkinTE product. In that [inaudible] and this will be difficult [inaudible 00:02:39] product was not invented by you. Imagine that you're attending say the American Society of Plastic Surgeons conference, there's a [inaudible] of presentations that are identical to the one made yesterday by the KOL. If you go back to the office next Monday, how would you summarize what you saw at the conference?

Denver Lough:

Thank you Elemer. I really appreciate the question. You're right that is a unique question, but I'll give you my answer. First and foremost the physicians that presents a summary of some of their outcomes across a variety of different complex patients, patient wounds, and different types and settings for deployment were vast and frankly incredible.

They focused on educating everyone in the room about the current standard of care which was a split thickness skin graft. They pointed out things that are commonly known by providers who apply split thickness skin grafts. But elements that a lot of the public, patients, investors and corporate entities may not know. Elements such as [inaudible] skin graft is incomplete, there are no appendages, there is re-epithelialization that occurs but not regeneration of full-thickness skin. But most importantly they began to focus on elements that involve other limitations of skin grafts. Particularly on who can and can't actually perform a skin graft. And that really is a surgeon's role. There are certain types of costs that are associated with split thickness skin grafts even though it's not commonly looked at as a product.

But having to go to the operating room, having to undergo anesthesia, having to be admitted to a hospital. And in addition to that they focused on the donor sites, the large strip of donor site skin is left behind that defect following the use of split thickness skin grafts. So I thought that was a relatively comprehensive education of where currently the clinical standard of care is. Those providers then went on to actually present some incredibly complex patients. Large burn patients for the clinical standard of care has failed multiple times. Burn patients that were suffering from systemic illness that effects the way the graft takes wounds that have been previously infected. Wounds that had bone, tendon, joint capsule, ligament exposed. And they showed that SkinTE regenerated cutaneous tissue within those wounds, even in the early stages that the clinical standard of care was not able to do. That advanced wound care products were not able to do. That conventional wound care wasn't able to do.

They also showed how this changed patient lives, how it could potentially change their current practice. With well these were the things could change the paradigm of wound care for burn reconstruction, wound care, chronic wound care, [inaudible] surgical reconstruction. In addition to that they made reference to patient and patient family members that were in the room that I know that actually didn't speak at the presentation but myself actually the first time I met with some of these particular individuals who told me about the incredible impact it made on their lives. And so I think that that was something that was incredible and something that was delivered well by those particular providers, and then gave their honest open opinion on what they thought was good about the product, what needed to be worked on with regards to the product, and where they think it could potentially be applied later in the field or in their practice.

Elemer Piros:

There was a discussion about the process itself. Of what you did to the biopsy segment [inaudible] 48 hours later to the surgical center. For us to better understand the intellectual property protection behind this, I would like to ask Jennifer, Jennifer Burdman, to give us an overview of the process of prosecuting patents a little better understanding of our both trade secrets that is also associated with the technology and how this process evolves since the point then that you Jennifer joined Polarity last August.

Jennifer:

Thank you so much. That's correct, so I'm Jennifer Burdman, chief intellectual property officer at Polarity. I joined the company last August, and at that time I'd actually all ready been working with the company as outside counsel at the law firm of King and Spaulding, I was a partner in their intellectual property group. So I've been prosecuting patent, in patent litigation for almost 20 years and was really excited to join and help formulate the IP strategy of the company back in August.

I would say our strategy involves the patent protection and trade secret protection of a commercialized product. Getting to your point about the process of filing a patent application and how that goes, the process is a back and forth, a series of communications with the US patent and trademark office and the patent examiner who is looking at our patent application. We need to show that examiner that our invention and claims in the patent application will fit the legal requirements to obtain a patent. This back and forth with the patent office is done in writing. The patent office issues what's generally called an office action. And then the applicant has both a variety of ways of responding to that office action. The back and forth typically takes a number of years.

In an office action, which usually receives a mail date, these days typically receive the office action from the patent office by e-mail. The patent examiner can take one of a set of actions with respect to the pending claim in that patent application. For each of these actions it can be on one of the pending claims, a subset of the pending claims or all of the pending claims. These claims can be allowed, they can be rejected, the claims can be objected to, or the claims can be subject to restriction and or election requirement. The first page of an office action, the examiner checks the box indicating the status of each claim.

Little more background, each patent application has a number of claims or numbered paragraphs at the end of the document. Those are what define the [inaudible] and bounds of what we are claiming what the invention is, that is intended use protected by that specific application. Specifically an applicant has a number of applications pending at any given time. That number can grow as it goes to processes of any one application.

We talk a little bit about rejections of patent claims and patent applications. Seems like a word that can be a bit misleading when taken out of context. Rejection of pending claims in the patent application, simply means that the patent examiner is not ready to allow the claim and issue the patent. Frequently the examiner provides one or more [inaudible] or publications as a basis for the rejection. And then the applicant's permitted to respond. For example by explaining how your invention is different than the publications provided by the examiner. You can also amend the pending claim in response to the examiners comments. And after the applicant submits the response to the examiner, the examiner then reviews the response and further evaluates patent ability. This back and forth process with the patent examiner can go on for years with multiple office actions being issued and responded to before a patent is finally granted.

Office actions generally take two forms. It can be final or non final. Again, it's a little misleading when taken out of context from the patent office because final isn't really final. On the action form the patent examiner checks the box to indicate which it is and it really provides a methodology or different pathways for a response to that office action. In a non final office action the applicant's entitled to reply [inaudible] reconsideration, further examination, with or without amending any of the claim. In final office action the applicant has a number of actions including amending the claims and explaining how your invention is different than the publication cited.

It's pretty typical for the first office action to be categorized as non final. And the second office action categorized as final. Of course many patent applications continue well beyond the issuance of a final office action. The process continues until the claim or a subset of the claim, when patent is granted, or until the patent applicant abandons the process for each every one of those pending claims. All the while the pending claims can be adjusted, amended, further clarified, to address any of the patent examiner's comments or rejections.

Elemer Piros:

In this process Jennifer, where were we last August when you joined? At what niche office action had taken place at that time? And how did you respond to that first office action, if that's the [ inaudible]

Jennifer:

Absolutely, so in August, by August we had received the first office action. It was a non final rejection, and that was received on April 7th, 2017. So we were in the process of drafting a response, formulating our response at the time that I had joined this company. The response was subsequently filed, and all of that is public information on the U.S. Patent Office's website: The Public Patent Application Information Retrieval System, we call that PAIR. We made some amendments to the claims, and we made some comments regarding the references that the Patent Office had stated against us. Those arguments were accepted, and now, as you see, we've received our second office action.

Elemer Piros:

That was on June 14th.

Jennifer:

Correct.

Elemer Piros:

Okay. In this second office action, the USPTO indicated that, despite our rejection, you had up to 90 days to respond. I presume if it's literally taken as a final rejection they would not regroup or respond.

Going forward, what are the options here in terms of the types of responses, especially considering that you have two additional patent applications? If you could just, generically describe maybe the architecture of some of these denied claims, the ones that were withdrawn by you from your original patent, and some of those that were labeled as pending. What potential avenues do you have to address these?

Jennifer:

There were the [inaudible] claims that the examiner has rejected in this office action, we have a variety of ways to respond. I can't speak to what our final response will be, but there are a number of pathways which include amending the claims, making arguments, meeting the examiner for an interview.

With respect to withdrawn claims, that occurs when you receive a restriction requirement which we did in the very beginning of prosecution. All that really means is we withdrew them from this application and we can put them in a second application and in fact we have three pending applications at the moment off of this same family, this one provisional that turned into a non provisional.

Our strategy is to cover the landscape with respect to all of our patent claims. Composition, not just with [inaudible] methods of statements.

Elemer Piros:

Okay, do we have a sense of knowing the track record of your particular examiner at the patent office, the corporate timeline, for the looking at for final determination? Based on the two reviews that you had and the responses that you provided, is this process now streamlined to a certain extent? Especially when we compare it to when it was a year and a half ago.

Jennifer:

Certainly, we are further along in the process than we were a year and a half ago. This process, takes years for any single patent application and I just mentioned that we have three of these non provisional pending at the moment.

It's really impossible to predict with any level of certainty when any specific patent might be granted or even what the exact claims might look like in that granted application. There is a certain industry around the statistical analysis of patent examination and how long any examination or examiner might take for processing the final grant. I've seen all sorts of ranges from three to six years and even more. To be honest I haven't done my own statistical analysis on this.

What I can say is that our strategy is to pursue patent protection across all of our technologies. We'll continue to file these applications respond to the office actions in a timely manner and explain to the patent office how our mentions are patentably distinct. We really do skip the paradigm of the underlying science of regenerative medicine. So, I can't predict for you when our first patent will be granted, but I am confident that in the future we will have a number of applications to be talking about at any given time.

Elemer Piros:

Okay. Can you just maybe touch upon the two additional applications. They are all three in the same family, but in a generic sense. What aspects of the technology would they protect differently, to an extent that you can go into in terms of the details?

Jennifer:

Sure. The way to really think about this, is they all stem from the same four documents and in fact what we call the specifications of the application is identical in all three. The differs of the claims at the very end of the application, the number of paragraphs, the leaps and bounds as it were.

In this first application that we have received these two office actions on. It's the record of making the MCSU for technology. In another application we have claims directed to GMCSU itself and compositions relating to it. In other applications we have other ways of making it. We have claims directed to method of using. This will continue to grow as we prosecute so this isn't the end of the conversation. This is really just the beginning of prosecution as I see it.

Elemer Piros:

Now that the application is in the public domain, if you could also describe the trade secrets that you have in place. To what extent do they make the reverse engineering process if someone wanted to copy the invention and use the technology on their own?

Denver Lough:

Elemer this is Denver. Before Jen jumps in I just want to make a distinction, when you are talking about trade secrets and reverse engineering, you are speaking specifically to the SkinTE product, that we are speaking about, the commercial product. I wanna make clear that there are a variety of patents that have a variety of claims. Patent applications that have a variety of claims. Those claims, as we have discussed are changed, some are withdrawn, some are added. That's about a total technology, a technology that is much bigger and much larger than the SkinTE product itself. The SkinTE product, if you will, is just one small component of a much greater technology. I just want to make sure that's actually what you are asking about, with regards to, the trade secrets, is for this specific product?

Elemer Piros:

I see, okay.

Also, in light of that the technology, in its broadness, is now putting in the public domain, the patent application stuck in the public domain [inaudible] the potential reverse engineering process that we are dealing with. SkinTE products or Other products easier for people and to what extent trade secrets in general allow further protection to mitigate that sort of risk.

Jennifer:

Yeah. Trade secrets are a nice way to further protect technology. When patents are filed, they are generally filed very early on in scientific development of the invention. They are not a commercial product and that is the case in our patents. The core technology as described there for the public to see. It can take quite a while to make a commercially viable product, which isn't always, just scientific pureness. It is also efficiency, cost effectiveness and the regulatory pathway for which we use for our commercial products. There is a lot of other aspects to how we make the product that are trade secrets that we don't discuss publicly or otherwise. So we do believe that we have very strong protection and that it won't be so easily reverse engineered simply by reading caps.

Elemer Piros:

Okay. Moving on to our next topic, which is regarding commercialization, you launched this product in a very limited fashion in December and over the case studies that were presented yesterday were for the introductory phase of this product launch. How many samples have been or products have been actually processed by you, by how many centers, and how are you going to move into this next phase with a broader introduction to regional markets in the northeast.

Denver Lough:

Absolutely so you are correct, the product itself, underwent a limited market release which was initiated in December 2017. This last December. In parallel to that prospective multi-centered trials had three separate facilities that were utilized in a manner or designed in a manner to compare SkinTE, directly and head to head against the current clinical standard of care split thickness skin grafts, was also initiated.

The limited market release which essentially targeted approximately fifty patients, approximately thirty centers, was initiated at that time point. We asked providers, particularly under a trial use agreement essentially, to use the product on the types of patients that they would typically use it on in their practice. We did this for a variety of reasons. We wanted to make sure that logistically, harvest, manufacturing, deployment of the product itself made sense, that it functioned in a manner that worked with the way that physicians practice today.

Everything from delivery, to deploying the product out of a syringe, to potential difficulties providers may encounter depending often in the operating room, if they are in clinic, if they are at a patient's bedside, if it's on a flat surface, its on a contoured surface; what kind of dressings work better? We did that, in there, to get that type of feedback so we could further optimize the logistics behind the technology. The last thing we wanted to do, was bring a technology that worked well in a dish or in an animal model, to clinical use, that didn't work from the logistics standpoint when it got into the clinical field of application. So that's why we performed a limited market release.

At that same time, like I said before, we initiated the prospectus multi-centered trial which myself and others have been fortunate enough to see some of that intern data and we actually made a statement in that our last 10-k. That it correlates with what we thought pre-clinically. Yesterday we described before that, it also correlates with what we received in the limited market release. That shouldn't necessarily surprise anyone. The limited market release, in particularly the patients who were presented yesterday, were very complex patients, that don't have inclusion and exclusion criteria formatted like a clinical trial itself. The clinical trial like I said is a split thickness skin graft, compared to SkinTE in the same patient in the same wound so that every patient acts as their own control and you compare that to the native skin. Essentially, the uninjured skin that's around that, with outcomes that look like graft takes, as well as full thickness, hair bearing skin regeneration. That limited market release and also the prospective multi-centered trial, three centers with twelve patients each acting as their own control.

Since we have transitioned into the regional market release with two major metropolitan areas have been announced already. Others will be announced shortly. We are now beginning to make sure that we are appropriately working out the logistics of the sales reps that are in that particular area, and that the coverage that is working and the networks that they've already been working in previously along with the clinical operations teams, who teach, support, and provide product support for the providers themselves.

This has continued to go on as we have projected internally, and we will continue to move forward with the regional market release now that we've had a successful limited market release. So, while we don't disclose active numbers of patients, and the reason being is it changes every day, and while we don't disclose how many institutions that we are currently in, because again that changes every day, we can say that we have completed now our limited market release, as well as initiated that multi-center prospective trials which we will have aggregate data released once those studies have completed their primary and secondary outcomes.

Elemer Piros:

And could you please discuss some of those primary and secondary outcomes, what specifically are they, and, I don't know if you've forecast the estimated time of completion of that trial, but if you give us an idea on then, and what might be disclosed that already was for the investigators, who want to present data at a conference or that I would be able to perhaps see the front line information.

Denver Lough:

Yeah, absolutely. So outcomes are actually being monitored by these independent centers across these patients. Instinctively, in simple terms, the comparison of the skin graft, to SkinTE and native skin. We use clinical outcomes criteria related to Vancouver Star scales, profusion using laser Doppler imaging, the formation of appendages, hair follicle, sebaceous glands, sweat glands. To actually directly compare that to a split-thickness skin graft, then native skin itself. Those are what those types of outcomes are, from looking at primarily with regards to primary and secondary outcomes. And real quickly the second question you asked me, could you just clarify that?

Elemer Piros:

About the estimated timing and method of the data.

Denver Lough:

Yeah, absolutely. Just so you know, the three centers are independent and objective. The principal investigators that are actually performing these studies that have begun to enroll patients, and treat patients, move at slightly different speeds. They aggregate data together then, an independent medical monitor actually has the ability then, to review all of that. After that data is aggregated, they will begin to release a potential skin data, based on the earlier time point, essentially a 90-day time point, and then potentially later on again, release data at a longer time point, closer to around a year.

So there may actually be, then, multiple publications that come out of this, but again, that is actually up to the three independent institutions, the three independent IRBs that are actually run the study again, independently.

So I would love to say that hopefully within the next year or so that we will begin to see those early results being published by those groups, and then I'm hoping, following that, there will be another release of publications, material from those providers, from those institutions, on the later term, and the later outcomes that they were evaluating, closer to that one year post-treatment mark.

It's hard for me to speculate exactly when they will complete the publications themselves. Because it does require process of bringing such data all together, then.

Elemer Piros:

Yes. As to what extend do you think the outcome of this clinical trial to be important for [inaudible]?

Denver Lough:

That's a great question, I mean, there's always some variability to that type of answer. First and foremost, the value analysis committee, which is common at facilities like hospitals and medical institutions like surgical centers are commonly what our medical access for market access and medical reimbursement team deal with and discuss with on a daily schedule with all of these different types of centers, and those are the ones who actually make the decision whether or not to approve it as an approved vendor, unapproved products, and then grant it payments. So that has already occurred in multiple different institutions that continue to occur in more and more institutions.

Elemer Piros:

So you don't have to interact with payers, medicare, et cetera.

Denver Lough:

We don't have to. We still do. We still do this stuff, these types of elements with payers as well. If they, essentially working with everyone who was involved. All of these shareholders that are involved in reimbursement, in value analysis of this particular product itself, so we do discuss with value analysis committees. We have discussed it also with payers about the product itself. The indications for use of this type of product.

The fact that it is autologous, homologous. The fact that we have shown now from the early data that comes in from these limited market release clinical use, essentially if you will. But then we will also have available to them, when it becomes available, the outcomes data from the perspective multi centered trial.

Elemer Piros:

Okay. It looks like that we have a few more minutes left. I'd like to talk to Cameron. If you could just bring us all to the same page, Cameron, and provide an equal opportunity for all of us on your S-8 registration that you recently expanded, regarding employee stock options.

Cameron Hoyler:

Absolutely Elmer. Thanks for the opportunity.

So PolarityTE, like many public companies has an equity incentive plan. It is a very customary practice. The companies did recently file a registration statement with the SEC on Form S-8. That was on May 29, 2018. And this is a very routine filing, for registering shares under the company's equity incentive plan. I think you know and I would expect that many of the listeners know that the registration of shares does not equate to a sales share. Moreover, there have been no recent sales of shares by management insiders, and in fact because of recent public offerings, management insiders have been precluded from selling shares by lock up agreements that have been in place since April 2018. So the suggestion that any shares were sold by management insiders on or around May 29, 2018 is false.

Elemer Piros:

Okay. Denver I started with you and I'd like to end and close out with you, I have a fairly generic question. You invest quite a bit of time, energy, as well as others in the management team in Polarity for the last couple of years. You are the inventor and remain the largest share holder in the company. Would you give your person investment philosophy in the stock?

Denver Lough:

My personal investment philosophy in the stock?

Elemer Piros:

Yes.

Denver Lough:

We are a new company. Essentially one that has been around for a little over one year. We have continued to execute and deliver and bring forward the technology that we said we would. The company itself, I believe personally, is just beginning to ignite the engine and has not even begun to take off.

I look forward to a long and lasting career with this company over a long period of time and over a wide range of functions. I wholly believe in the integrity of this company, the incredible research and development of the technology, in the amazing team that we brought with us that continues to grow with us and the amazing team that will be to come. I believe, again, that Polarity is going absolutely in the right direction and look forward to developing and deploying more of our CoreTE technology and the related technology derivatives that will begin to be spun off and made public again shorty as well.

Elemer Piros:

Thank you very much for that. And thank you to all for attending this morning's call, and I think this is very, very truthful and useful for all of us and again, appreciate your time.

Denver Lough:

Thank you Elmer, we really appreciate it.

Elemer Piros:

Have a good day everyone.

Michelle:

Thank you ladies and gentleman this concludes today's teleconference.

Disclosure: I am/we are short COOL.