Athersys, Inc.
Q2 2018 Earnings Call Transcript

Published: 8 Aug 2018

[Operator:]

Good afternoon. My name is Sumaria and I'll be your conference operator today. At this time, I would like to welcome everyone to the Athersys' Second Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference to our host, Ms. Laura Campbell. Madam, the floor is yours.

[Laura Campbell:]

Thank you, and good afternoon, everyone. I'm Laura Campbell, Senior Vice President of Finance for Athersys. Thank you for joining today's call. If you do not have a copy of the press release issued at the close of market, it's available on the Athersys' website at athersys.com, or you may call Matt Celesnik at 216-431-9900 to receive it via e-mail. BJ Lehmann, President and Chief Operating Officer and I will host today's call. The call is expected to last approximately 30 minutes, and may also be accessed at athersys.com. A replay will be available two hours after the call's conclusion and access information for the replay is in today's press release. Any remarks that we may make about future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements as a result of various important factors, including those discussed in our Forms 10-Q, 10-K and other public SEC filings. We anticipate that subsequent events and developments may cause our outlook to change. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. For the benefit of those who may be listening to the replay, this call was held and recorded on August 7 of 2018. Since then, we may have made announcements related to the topics discussed. So please reference our most recent press releases and SEC filings. With that, I will now provide the second quarter 2018 financial results and then turn the call over to BJ for a corporate update, followed by a question-and-answer period. During the second quarter of 2018, revenues increased to $19.4 million from approximately $700,000 during the second quarter of 2017. Of that increase, $18.5 million is related to our collaboration with Healios that was extended in June 2018 to include several additional licensed indications. Our other revenues were slightly higher in the second quarter of 2018 compared to the comparable period last year. Research and development expenses increased to $10.1 million in the second quarter of 2018 compared to $4.6 million in the prior year three month period. The $5.5 million increase relates primarily to an increase in clinical development cost of $4.4 million, an increase in license fees of $600,000, and an increase in internal research supplies and other research cost of approximately $300,000, and lastly an increase in personnel cost of $200,000. Our clinical development cost during the 2018 period reflected increased clinical product manufacturing cost, technology transfer cost for manufacturing in Japan, start-up contractual cost related to our MASTERS-2 stroke trial and process development activities to support large scale manufacturing. Healios reimburses us for a portion of the clinical product manufacturing cost for their TREASURE trial and reimburses us for all of our technology transfer cost in Japan. General and administrative expenses increased to $2.4 million for the three months ended June 30, 2018 compared to $2.2 million for the same period in 2017. The increase was due primarily to an increase in professional fees, consulting services, personnel cost and other administrative costs compared to the same period last year. We had net income of $6.9 million for the three months ended June 30, 2018 compared to a net loss of $6.3 million for the same period of 2017. The difference of $13.2 million reflects the above variance or the variances I've already discussed, as well as an increase of $200,000 in other income items. Net income per share was $0.05 in the 2018 quarter compared to a net loss of $0.06 per share in the second quarter of 2017. During the three months ended June 30, 2018, net cash provided by operating activities was $4.4 million compared to $5.7 million of net cash used in the second quarter of 2017. And note that included in our cash proceeds for this quarter were $12.5 million of license fees from our expansion with Healios. As of June 30, 2018, we had $53.4 million in cash and cash equivalents compared to $29.3 million at December 31, 2017. With that, I'd like to turn the call over to BJ for a corporate update. BJ?

[William Lehmann:]

Thank you, Laura. And thanks everyone for joining the call today. Gil is not available today, so I will provide the corporate update. I'd like to start with a couple of important updates. First, as we communicated in June, we have continued to expand our collaborative development relationship with Healios. We announced an expansion of the existing license agreement with Healios' exercise of its option to include acute respiratory distress syndrome or ARDS into the scope of its Japan license, as well as to include additional applications of its organ bud technology utilizing our MAPC Technology into its global license. We also granted Healios rights to use our technology in the ophthalmology area globally, and in combination with iPS-derived cells for certain organ transplantation applications in Japan. This expansion of license rights falls in half [ph] of the substantial investment in our stock made by Healios in the first quarter. These arrangements further align our interest and actions, but they also provide Athersys with $41.1 million of additional capital in the form of equity investment and completed and committed license fee payments. We continue to discuss with Healios the possibility of a further expansion of the collaboration, including, among other things, exclusive option to a license for rights to develop and commercialize MultiStem therapy for certain indications in China. We believe that there is substantial opportunity for stem cell therapies in China as our analysis and recent partnering activity in the cardiovascular area illustrates. I do not plan on further discussing these negotiations in this call other than to say that though our discussions with Healios have been constructive. It is important to remind everyone there is no guarantee that we will enter into a Chinese option agreement or license with Healios or otherwise further expand our collaboration. That said, our day-to-day activities with Healios have been collaborative and productive as we work to meet the shared goal of achieving approval for MultiStem therapies, important disease areas and geographies. Second, as we noted in our press release, we recently initiated the MASTERS-2 study, our registration study of MultiStem therapy for treatment of ischemic stroke. Shortly after open patient recruitment, we enrolled our first several patients in this study. This study initiation represents an important milestone for our lead MultiStem program and for the company as it represents our first Phase 3 study. We plan to employ a phased ramp up of this study, initiating with a small number of sites in the U.S. this year, adding a larger number of U.S. sites early next year, followed by European sites. This approach reflects a number of factors, including our ongoing support of Healios' TREASURE study, management of the operational requirements associated with initiating large number of sites and regulatory considerations in Europe. Overall, as we have summarized previously, the study will include 300 subjects and will be conducted at approximately 50 clinical sites in North America and Europe. It is difficult at this point to project with precision when we expect to complete this study, but our target is to complete enrollment sometime in 2020. Though we are just at the beginning of the trial, the early enrolment activity and the investigator enthusiasm for the study is very promising. Healios' TREASURE study continues to enroll subjects as Healios adds more sites to its program. We cannot comment more on Healios' enrollment, and further updates will come as Healios comments publicly about the study. However, in Healios' quarterly earnings call held earlier today, Healios management reiterated their goal of completing enrollment in 2019 and having both the three month primary results and one year final results in 2020. We are nearing completion of enrollment of our ARDS study and expect to complete enrollment within the next several months. As a reminder, this study is a small exploratory trial to evaluate the safety and feasibility of MultiStem treatment to patients who are affected by ARDS. ARDS is a serious inflammatory condition that severely affects lung function. It typically occurs in patients who are critically ill and may result from a number of underlying causes including severe pneumonia, major trauma, aspiration of near-drowning and organ failure among other things. ARDS can vary in intensity among patients and can result in lasting damage to the lungs. And for more severe cases or among older patients, there is typically a high mortality rate. Our study is intended to provide information about the patient population in MultiStem treatment that can help inform our subsequent clinical development, including about which of the patients are most likely to benefit from treatment and about the nature of MultiStem administration. Though the study is small with just 36 subjects we are also collecting some data intended to help us understand the potential for biological and clinical effect. However the study is neither designed nor powered to demonstrate efficacy meaning that we're looking only for information of signals that would be relevant to future development. As I noted above Healios recently exercised its option to expand the scope of the Japan license to include MultiStem therapy for the treatment of ARDS. We believe there is a meaningful opportunity to help patients in Japan suffering from ARDS and we look forward to supporting Healios' efforts to develop MultiStem product to address this area of significant clinical need in Japan. Now these were the highest priority programs of the company for the moment. We have other clinical development activities as well. For instance we continue to enroll subjects into our acute myocardial infraction in FORTUNE study. Enrollment has been well below expectations for some time due to a number of operational considerations including some changes to treatment practice for heart attacks. We continue to explore avenues for improving our study performance while remaining true to our objective of demonstrating the MultiStem treatment following AMI improves blood flow and is likely to be associated with improvement in clinical outcomes such as cardiac function and the so-called MACE or major adverse cardiac events. Additionally as we have previously described we are preparing to undertake a trauma study in collaboration with University of Texas at Houston and the Memorial Trauma Texas Medical Center one of the busiest level one trauma centers in United States. Trauma is generally associated with systemic inflammatory dysfunction including acute kidney injury, ARDS led to a compromise, multiple organ failure that may involve traumatic brain injury as well. The study is intended to evaluate the safety and efficacy in MultiStem treatment with the objective of reducing the severe inflammatory complications of trauma that increase patient susceptibility to severe adverse events and impede recovery. As such this study builds on a central theme for MultiStem treatment. Cell therapies potential to module acute severe immune system dysfunction and reduce the severe complications associated with ischemic and traumatic events. Our objective is to start the study early in 2019 and we plan to provide further information as our ongoing preparations advance. With an eye towards planning for eventually success in generating substantial value for our shareholders we have continued to invest in building the capabilities and mind the ground work to enable us to apply for, gain approval for successfully launch MultiStem therapy for stroke and potentially other treatments. In addition to the favorable clinical results successful require a productive and efficient regulatory effort favorable positioning of the therapy and its value proposition with reimbursement agencies and pavers, sufficient manufacturing capacity and product quality and ultimately strong commercial outreach and management. We are already engaged in most of these areas and are focused on achieving success in each of them. Where it makes sense we work with outside experts to help us refine and execute our strategy. For example we are working with leading consulting firms to assist us with development planning and execution of our reimbursement and payor strategy. Even with the therapy that potentially provides substantial value to patients and payors thoughtful and well executed efficacy and navigation of the complicated utilization of payor environment ensure optimal product positioning, reimbursement and value creation. Additionally we have made some important hires in to Athersys in the regulatory quality, process development and many fractioning areas. For instance last week we announced that Greg Liposky has joined our team to help lead our manufacturing activities. Greg brings more than 35 years' experience and successfully lead biopharmaceutical manufacturing operations and process development efforts on an international basis. Importantly he's both works with contract manufacturers and established in-house manufacturing facilities to meet clinical and commercial product needs and he's overseen all aspects of the manufacture and supply chain. We're excited to have him and other new members on the Athersys team. We will continue to add to our team, experienced leaders, managers and employees, especially in these important areas. With respect to manufacturing, more generally, we are making progress. We continue to build redundancy into our manufacturing network. We have multiple contract manufacturers with several facilities represented in the United States, Europe and Asia. For example, recently, we established a manufacturing presence in Japan through a relationship with Nikon Cell Innovation. Our intention is to work with Nikon to manufacture clinical and commercial product for the Japanese market in support of our collaboration with Healios. Additionally, we are working with other contract manufacturers to establish manufacturing capacity to support our development efforts and potential commercial launch. Ultimately, we may also consider having our own manufacturing plant to support commercial activity. Cell therapy manufacturing is a field that's still maturing with ongoing investment in capacity and active development efforts, including by us, to optimize approaches for commercial scale-up. Fortunately, there have been some challenges along the way as we have noted in the past with operational issues at our contract manufacturers causing us time and money. With respect to our own process development work, we have focused on, one, the transition of large scale manufacturing approaches including bioreactors. Two, the unique requirements of cell manufacturing of processing large volumes in short periods of time. And three, enabling rapid, simple and efficient product utilization in any hospital environment among other things. Based on this work and the robust characteristics of our cell product, we believe that we have a distinctive platform that will be a source of substantial competitive advantage. We are at an important transition point in the company's history. We have pivotal studies underway in stroke and an exciting pipeline of other opportunities in ARDS, trauma and AMI among others. We are assembling the team and building out the capabilities to ensure successful navigation of the late stage development, the regulatory and pricing and reimbursement issues and challenges and a successful commercial launch of a product platform with the potential to affect millions of patients across the globe. As we have done recently, before we take questions from today's participants, we would like to address several questions that have been submitted to us from shareholders and others interested in our technologies. So with that, I'll start with question one, which was submitted by Joel. Can you please discuss more about the animal health opportunity and its progress? As you recall, we entered into a collaborative agreement a little over a year ago. And I can update to some extent on that activity. So we've conducted research in multiple areas and species, targeting the treatment of conditions where there is unmet need in horses, dogs and cats. We have developed candidates with the desired biological activity and have promising results from in-vivo studies that have been conducted. We have active research collaborations including with a leading company in the animal healthcare space, as I mentioned, but I am not at liberty to discuss this research at the moment or the overall status of this collaboration. However, based on the results and studies that have been completed and the apparent size of the market, we remain excited by the potential of our cell therapy to treat certain conditions in these animals. And we will update in the future as is appropriate. The second question has been asked by several people. Would you comment on the company's financial position following the license expansion and investment by Healios? As Laura and I have already discussed, following the Healios collaboration activity, we are in a strong financial position with $53.4 million of cash on the balance sheet at the end of the second quarter and an additional $7.5 million of committed license fee payments due over the next several quarters. As we advance our planned clinical trials and continue to build the capabilities essential for us to gain approval for, successfully launch and commercially supply MultiStem therapy for stroke and potentially other treatments in multiple geographies, we expect to continue to invest, adding more capital over the balance sheet along the way through business partnerships where the capital markets will allow us to accelerate and expand these investments with the purpose of optimizing healthcare impact and value creation of our MultiStem therapies. Our third question comes from Fred. Can you discuss the market potential for ARDS? As I noted above, we believe there is a meaningful opportunity to help patients suffering from ARDS around the world. ARDS patients generally are critically ill and may spend weeks to months on a ventilator and in the ICU or the Intensive Care Unit of a hospital. From a healthcare policy perspective, these are highly - they are high-intensity, high cost patients who face substantial side effects, loss of function, additional post discharge healthcare cost and decline in quality of life to the extent that they even recover. For example, one study estimated that average hospital cost of more than a $125,000 post discharge out-patient rehospitalization and medication cost of approximately $50,000 and about 50% one year return to work rates for ARDS survivors. We believe that a successful therapy has the potential to substantially reduce intensive care, hospital time and improve long-term outcomes, providing a strong foundation for favorable reimbursement. Furthermore, there are as many as 500,000 patients annually in the United States, Japan and Europe. These factors drive a substantial market opportunity for successful therapy, which we hope MultiStem treatment will be. So in short it's a large opportunity where we believe we can have meaningful impact with patients. So now, we may have time to answer a few more questions.

[Operator:]

And you do have a question from Chad Messer with Needham & Company. Please go ahead with your question.

[Chad Messer:]

Great. Thanks for that update and congratulations on the progress, in particular with getting your trial enrolling and withstanding here a deal with Healios. You did go through a lot of details, but just want to make sure I understand what's been received and what scope is outstanding to you from Healios. So you recognized $18.5 million in the quarter, if you could just take a second and breakdown what that was comprised of? And then remind us, I think you still have some more payments coming from Healios in the relatively near-term?

[William Lehmann:]

Right. Thanks, Chad. I'll take a cut at it and Laura can contribute as we go along. So, first off, let me say that the revenue accounting around a collaboration like this is actually quite complicated. So, I actually like to focus on the cash flows related to the collaboration. And you know in that case, it's relatively simple. So, from Healios this year, they've made a $21.1 million investment in equity in the company, which was disclosed in the last quarterly call. And with this expansion, essentially, they've paid or committed to pay $20 million of additional license fee payment. $12.5 million of that has been received already. And then $7.5 million will be received over the next several quarters. So from a cash flow perspective, that's what it looks like. From a revenue perspective, as I kind of indicated, it can be fairly complicated. But essentially, take the overall collaboration and you break it down into parts and then you assign revenue associated with the value received or transfer in this particular collaboration expansion. And so, the $18 million reflects essentially the lion share of those fee payments that I just talked about from a cash flow perspective, reflecting the allocation of the different portions of values associated with the collaboration and that includes the license fees, but it also includes the provision of services we're committed to provide to Healios over time. And just one example of that would be we're obligated to provide product to them over time with respect to these license arrangements now we get reimbursed for that product but it gets calculated in to the overall value contribution with respect to the collaboration and represents a proportion if you will of $20 million that we brought in and it really drives kind of the revenue recognition this quarter. You want to add anything else Laura?

[Laura Campbell:]

Yeah you did really good job that's right.

[William Lehmann:]

It's totally complicated. Is that a little more clear, Chad?

[Chad Messer:]

Yeah, and thanks, very helpful, and congrats again on that to expansion; clearly an important milestone for you guys.

[William Lehmann:]

Thanks Chad.

[Operator:]

Our next question is from Katherine Xu with William Blair. Please go ahead with your question.

[Katherine Xu:]

Hi good afternoon I was just wondering whether you could give some more granularity on the Chinese rights that negotiation with Healios has been taking quite some time what are the major issues that are in sort of the highest level of debate, just some color will be very helpful and then whether there are any other partners that you're considering for the China rights as well?

[William Lehmann:]

Right thanks Katherine. Yeah I can comment on that first off with respect to the Healios collaboration and the discussions we've had as you know we've had collaboration with Healios for several years now. It's been very productive collaboration we work well together. The focus has been for the most part on the Asian opportunities and in particular Japan the expansion extends that in a couple of different areas. The numbers of things we're talking about kind of ability into that collaboration are several things some which are relatively complicated from I guess negotiation perspective and operational perspective. And so it has taken some time to work through each of that elements potential collaboration. So it's clear as we disclosed today and in June what is now included in the collaboration and without going into great detail but it includes stroke in Japan, ARDS in Japan, ophthalmology globally what's called the organ bud technology opportunities and so forth. And these are substantial opportunities with respect to the ongoing negotiations one of the key areas for addition negotiation, discussion with Healios relates to rights to develop and commercialize certain indications in China not the only thing we're talking about it's one of the more important components. And that is it's --I would say a complicated negotiation we've done a fair bit of negotiation already but in terms of completing the execution of the expansion in June and giving appropriate time and thoughtfulness to kind of the nature of what a collaboration with China can look like and how it's best with both companies it's taken some additional time so we gave ourselves Healios and Athersys the necessary time to kind of work through in some of those open issues. And the idea is kind of reach the perspective on whether it make sense to conclude an expansion be included into China option rights over the next little bit of time right we give ourselves several months to get that done. So we're moving forward in productive discussions and I think there is some work to be done but we're working on that with Healios as best as we can. We believe we've talked about in the past that there is substantial opportunity in China for cell therapeutics. The markets are still developing I think this creates a little bit of lack of clarity with respect to the market opportunity going particular what the kind of reimbursements going to look like, how ones actually commercialized etcetera and that's at the course of the ongoing discussions with Healios as an example. But we see this is a substantial opportunity. We've talked with many companies in China we've engaged in more advanced discussions with several. Whether we elect to do something in China in Healios or with another party that will be played out overtime. At the end of the day we want to get the right partnership, the right collaboration in place for the company, one that's got potential to drive one for value creations so it's got to be the right deal with the right partner. And in China in particular, you know there are some other factors consider that are unique, but reflect the nature of this developing marketplace and that includes things like how do you ensure protection of intellectual property that's approved greatly over the past years, what's our manufacturing strategy with respect to China, in particular given some of this intellectual property challenges, and then as I said, how do you think about reimbursement and commercialization in a market that's still developing. So, that's kind of where we stand. We'll have more updates with respect to Healios I think in the relative short-term, sort of next month or two with respect to China and some of the other discussions we're having with them.

[Katherine Xu:]

Great. Thank you. And with regard to finances, do you think you have enough resources to fund through the end of the top-line rebound of MASTERS-2 and what is the plan of guiding through that timeline?

[William Lehmann:]

Well, I mean we have several milestones along the way. I mean obviously, there is MASTERS-2, there is TREASURE as well, which you will read out probably earlier than MASTERS-2 is our expectation. We have some other things in the clinical hopper and we have potential business development activity as well. So, as we just talked about with respect to the Healios, but other discussions as well that ultimately have some impact on how we think about kind of the capital position and where we stand and kind of running room and all that sort of thing. I think that kind of the high level is we feel like we're in a strong position now with respect to the balance sheet. Obviously, we've got some mechanisms kind of in our back pocket if we needed to use them, as an example equity line. By the way, we haven't used that at all since the first quarter, but it's there. So, we feel like we're in the strong capital position as we stand with respect to moving things forward. And as a result of that, we launched our MASTERS-2 study. We wouldn't have done that if we didn't feel like we have the financial strength to support that launch and execution of that study. So, that's kind of where we stand. We've got some business development things that we're working through and we're going to go from there.

[Katherine Xu:]

Thank you.

[William Lehmann:]

Okay. You're welcome.

[Operator:]

Our final question will be from Jason McCarthy with Maxim Group. Please go ahead with your question.

[Jason McCarthy:]

Hey BJ, thanks for taking the question. I just want to shift gears if I could, if you can give us some more clarity on the potential next sets of catalyst, while TREASURE and MASTERS-2 might be kind of on auto-pilot, those are late 2019 events. Can you give us some more color around the upcoming TRAUMA trial, the ARDS study and when we may see data that we could view as potential catalyst for the company? Thanks.

[William Lehmann:]

Thanks, Jason. I am happy to provide a little bit more color there. So as I mentioned, there are number of clinical items, as you pointed out. I think the stroke trials are launched in there on their way, both the read out and we complete and I've given you some perspective on that today. That's both the TREASURE trial in Japan and then the MASTERS-2 in the U.S. and Europe. We have - we're going to have an ARDS read out, clinical trial read out relatively soon. So remember, as I mentioned, it's an exploratory study. We are gathering data that ultimately will kind of read on or provide perspective about the biological activity of the product in these patients and provide us some sense of potential for clinical affect, it's not an efficacy study, powered through efficacy. In terms of timing for that, we have a handful of patients remaining. And once we complete that, it will be several months before we have data to report out to the market. That's driven by the timeline of the endpoints, obviously as well by the analytical time required as well. So, again, handful of patients, we complete that several months and then a read out with respect to ARDS. As I mentioned with respect to the TRAUMA study, our objective is to get that started early next year. The good news is, that's a study that's going to take place at essentially the leading kind of trauma center in the United States, if not that, one of the top-tier. And so we expect based on that and some experience they've had working in the area before that, that could be a relatively efficient study. But I can't give you any guidance on the timing. Right now the design is built around 150 patients. We still have little bit of work left to do to get that launched. We've got to finalize the regulatory dialog and so forth. We've got to prepare and do some manufacturing of product with respect to the study and so forth. But we're excited by that study. It's something that's kind of right in the strikes zone with respect to the kind of effects we're seeing in some of the other areas in which we work. Huge information in trauma, kind of the side effects associated with that systemic inflammatory response. So we have great enthusiasm about that study. We're really eager to get it started as are the other folks down at Texas. So, those are the near-term kind of clinical kind of milestones I see. You know on the business side, again, we've got a couple of things that we're working on, obviously the one that's been disclosed is the Healios collaboration, but we have other activities as well. So, those could turn out to be important things along the way. Aside from that, we're going to have operational kind of metrics and milestones that we'll report out on. I think importantly related to the building out the capabilities to ensure that we're successful as we launch and get in the commercial activity. Those are not as exciting to the Street, the market, but the reality is they're key to driving success over time. So we'll report out on those as well. Hopefully the markets will understand that we're putting in place kind of the key foundation stones to really give us the best chance to maximize our impact for patients and also value creation. So, I'd kind of leave it at that for now.

[Jason McCarthy:]

Okay, great. Thank you for taking the question.

[William Lehmann:]

Yeah. Thank you, Jason.

[Operator:]

And at this time, there are no further questions. I will now turn it back over to BJ Lehmann for final remarks.

[William Lehmann:]

Okay. Well, I'd like to thank all of you for participating today. I know it's a summer month and folks are on holiday, but there are many of you that came in. So, we appreciate that. And we want to thank you for your continued support for the company and our efforts. Have a good day.

[Operator:]

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