Plus Therapeutics, Inc.
Q1 2013 Earnings Call Transcript

Published: 10 May 2013

[Operator:]

Good afternoon, ladies and gentlemen. Welcome to the Cytori Therapeutics First Quarter Earnings Results Call. [Operator Instructions] Before we begin, we want to advise you that over the course of the call and question-and-answer session, forward-looking statements will be made regarding events, trends and business prospects, which may affect Cytori's future operating results and financial position. Some of these risks and uncertainties are described under the Risk Factors section in Cytori's Securities and Exchange Commission filings, which Cytori advises you to review. Cytori assumes no responsibility to update or revise any forward-looking statements to reflect events, trends or circumstances after the date they are made. It is now my pleasure to turn the floor over to Chris Calhoun, Cytori's Chief Executive Officer. Sir, you may now begin.

[Christopher J. Calhoun:]

Okay. Thank you, Paula. Good afternoon, and welcome to our first quarter 2013 financial results and business update. I'm joined today by Dr. Marc Hedrick, our President; Mark Saad, our Chief Financial Officer; and Clyde Shores, our Executive Vice President of Marketing and Sales. As I emphasized on our investor call in March, in order to drive shareholder value, we're focused on 4 primary objectives

[Operator:]

[Operator Instructions] Your first question comes from Steve Brozak of WBB Securities.

[Stephen G. Brozak:]

I do want to shift to something on the Japanese side. Nature Medicine just published a piece talking about how they're looking to provide fast-track approval for stem cell therapies and, obviously, this is significant for everyone in the industry. But can you give us some color and some detail on how extensively you are integrated into the Japanese research system already? And I've got one follow-up question after that, please.

[Marc H. Hedrick:]

It's Marc Hedrick. I'll take that question. If you want to know more specifically about our understanding of laws and -- itself, I'm happy to answer that, but I'll let you drive that. Let me just answer your question and provide more of an overview of where this fits into our strategy in Japan. And I did read the article and the timing was interesting. That article, in my view, just fundamentally validates what we've been doing in Japan and our focus on building a regenerative medicine infrastructure there, in my view. We've been there about 8 years, I guess, in the Japanese market. We have a K.K. that's been positioned there for a long period of time. In fact, probably the leading regenerative medicine and cell therapy company in Japan arguably. We've got about 50 systems in place, well over 10 investigator-initiated studies, as Chris said, some of them funded by the government. And I -- probably, 1/4 to 1/2 of our 5,000 patients have been treated in Japan. So we're unbelievably focused on Japan, and over 1/2 of our revenues are anticipated to come there. What you may not know is over the last couple of years, we've been actively involved in terms of our regulatory group, clinical group in shaping these emerging regulations. So we've been on the ground floor as these have been coming through the system. So I think to still it all down, we've got an office of about 20 people over there, a full business license. And in my view, because of that investment in time and effort over almost a decade, I think we're better positioned than any company in Japan to take advantage of the sea change in the market there.

[Stephen G. Brozak:]

Okay. And the follow-up, actually, has to deal with that. You are, obviously, a commercial entity. And given the fact that you're building up a ramp up within United States government and with everything that you're seeing now, what kind of a response do you get from potential collaborators? Because now they're, obviously -- we are hearing about how large pharma, large medical device companies don't really have anything to replenish their revenue requirements. What kind of a tenor are you now seeing in terms of those types of discussions as far as business partnering or potential developments going forward, especially when you consider that the government has basically gone out there and said that they are working with you as a partner now? And I'll jump back in the queue after that.

[Marc H. Hedrick:]

I think we see it at a couple different levels. You see it kind of globally when you talk to the partners, hospitals, physicians because they recognize that the government is really putting their weight behind the whole regenerative medicine cell therapy side. So you clearly see it there. But you also see it from the perspective of the individual physicians who are increasingly coming to us because they have a recalcitrant or difficult clinical problem, and they know that we have the corporate infrastructure that we can help them get up and running clinically using cell therapy today. So we see people across the entire clinical landscape in Japan coming to us and saying,"Hey, I've got this problem, can you help us?" And in many cases, we've put together the clinical dossier for maybe another group. And so they're relatively small changes that we have to put into place to get them up and running. So we're building sort of a scalable model to be able to do that and it's very effective in Japan. And then let me just say a little bit about Astellas because that's the group that is very interested in what Cytori is doing. And as you know, we've had an optional relationship with Astellas over a couple of years that recently expired. But I could tell you from my perspective, that relationship is as close as ever. They are a significant shareholder, have a board observer seat. And what we hear is that, internally, at the senior management level, they're very committed to regenerative medicine, which is not something you commonly see at big pharma, at least we don't. So there's an example related to your question of a company that is actively exploring ways to give it to regenerative medicine. And I think -- we think a lot of that exploration is targeted towards us.

[Operator:]

Your next question comes from Yale Jen of Roth Capital.

[Yale I. Jen:]

The first one I have here is that, do you think you're going to maintain the cash guidance for -- revenue guidance for above $15 million for the year. In the first quarter, the product revenue seems a little bit light, so should we anticipate a more sort of robust growth or sequential growth over the next 3 quarters?

[Clyde W. Shores:]

This is Clyde Shores. I think the first quarter sales were about where we expected them. As we've guided in the last call and this call, we expect a more significant growth in the second half of the year. And that will be reflected by the ramp up that we'll see, particularly in Japan, now that we're in full swing of getting established with more distributors there. Because it was just September, as you may recall, that we got our license and also obtained a Class I approval. And so we've been actively engaged in expanding our relationships with quite a few distributors, more than 20 across Japan. And so it's a matter of establishing those relationships, enabling them to bring systems into their pipeline and then working with them to take those out into the hospitals. And I think the new regulations that Marc just talked about will help to accelerate that as we move toward the end of the year. So we're on track as we expect. And then likewise in Europe, we're utilizing the expanded CE Mark claims that we received last summer, and that's continued to broaden our usage, broaden the indications that physicians can treat in a given hospital. I like to use the analogy it's very much like your iPhone and your iPad where we've provided a platform with solution, and now hospitals have more applications that they can use in that setting. We expect that growth will also come as we expand into new customers throughout the countries in Europe, those where we've already had current hospitals and customers, and also new countries where we've received regulatory approval and establish new distributor relationships. So we're on track for our guidance this year, and I feel good about what we've done in the first quarter and where we're headed for the next 3 quarters.

[Yale I. Jen:]

Just a little bit follow-up here, is that you mentioned the account -- a conference for differences in Japan versus in the United States. However, the one you only recognized the revenue, you received their payment. So would there be the $15 million revenue you anticipate, probably revenue anticipate for this year that's from P&L perspective? Would that be a little bit spill over to, let's say, 2014 in the first quarter?

[Mark E. Saad:]

Hey, Yale, it's Mark Saad. I'll take that one up. The $15 million, first and foremost, is the combined product and cash contract revenue, which is essentially the BARDA contract revenue. So it really, those 2 go together to equal our guidance. So when you look at the P&L, you'll see the product revenue, you'll see the gross profit, and then below that, you'll see the cash contract revenue. So when you aggregate the 2, the product revenue and the cash contract, and that's where you get to the $15 million, and that's consistent with our expectations of what will -- what we expect to realize this fiscal year. And we factor in the -- what was suggested before. And frankly, we suggested on the call back in March that due to some of those contract differences, it's likely that from a U.S. GAAP perspective, the -- on collections, we get the credit. So we'll see shipments increase over the course of this quarter, and that will give us a little bit of additional confidence. But then you can also look at last year where, fundamentally, nearly 50% of the revenue product revenues hit in Q4. And I think that there is a little bit of that reality, given just the capital nature of the -- of product sales currently. But certainly from a second half point of view, between increasing shipments in Q2 driving increased recognition in Q3 and Q4, that's how we see getting there and factor that into the $15 million.

[Yale I. Jen:]

Okay, last question here. Just a little bit guidance in terms of the gross margin. I think this quarter was about $56 million. Was that something we should anticipate, or you would have a slight difference going forward?

[Mark E. Saad:]

It's going to vary a lot. And the best way that I can guide people on that is you almost have to assume that there's a certain amount of physical overhead and staffing that you're going to have if you sold $1, $1 million or $10 million. And so you really see that if you look at 2012 and look at the quarters, and look where our Q1 of 2012 at 42%, then you look at Q4, when we had north of $4 million revenues and we were in the mid-60s. So when you get it normalized to a level of -- leveraging that fairly small but certainly meaningful manufacturing infrastructure that we have here, you see it getting into the 50s and 60s as you get into the $2 million, $3 million, $4 million per quarter in revenue. So it really is a direct function of the revenue line more than anything else. We're not dynamically changing our manufacturing capability. In many respects, it is what it is, and then the incremental labor and materials on the margin is fairly modest. So you get a lot of leverage as you get up to the $2 million, $3 million, $4 million lane. It's like if you look at last year and then scale your quarters appropriately for the revenue line, then I think it's fairly direct relationships in terms of how you can expect the gross line to be with some inherent variability if it's an incremental Japan sale or European sale, you get mixed issues, but the bigger issue overall is just fundamentally with the revenue line.

[Operator:]

Your next question comes from Jason Kolbert of the Maxim Group.

[Jason Kolbert:]

I want to stick on Yale's theme for just a minute. And Mark, can you help me break down the revenue in terms of the contract revenue? Because if you're talking about $3 million in contract revenue and we're talking about $12 million in product sales, and Yale's right, that's a pretty steep climb through the end of the year. So I assume you're talking about doing a better comp versus fourth quarter 2012 when we look at our modeling for fourth quarter 2013.

[Mark E. Saad:]

Sure, Jason. Look, let me make sure I answer your questions. So can I take the product revenue side of it first?

[Jason Kolbert:]

Yes, that would be great.

[Mark E. Saad:]

Great. Well, on one hand, you could look at Q -- one could, and this isn't how the business works, by the way, but from an uptick's point of view, you could look at Q4. And from a product revenue point of view of Q4 2012, and say, well, is it unreasonable to suggest based on how they did in their first quarter out of the gate with some -- I'd say, some little bit of pent-up demand from some customers that were really looking for that approval, but that they represented a very small tip of the iceberg of what we believe the eligible customer base is for this Class I product. But as a guide to our point, $4.3 million or so of Q4 product revenue in 2012, on annualized basis, obviously, gets you north of $16 million. We're seeing $12 million for the year. So I think, keep in mind, second half, particularly Q4, are when you do see capital equipment sales loaded. You can look at companies like GE and the proportion of their MRIs and ultrasounds granted solutions are very small piece of equipment by comparison. Well, you saw a similar phenomenon, and I think the second half will reflect that in the sales funnel when we get granular. We look at the customers, we look at where they are in the funnel, they line up to that. And so we see specificity on a bottoms-up basis, and we see top-down factors as well that gives us, currently based on everything we see today what we said, which is current confidence in the full year. And it's not linear though. It's not each quarter incrementally, it's definitely -- we've used the word lumpy before, but it's not lumpy. In a vacuum, it's lumpy with context coming from very specific sales volume.

[Jason Kolbert:]

And how should I deal with the contract revenue which totaled $2.3 million, but the majority, of which, going forward, is going to be BARDA? And if I just use the BARDA number on your total guidance, what are you -- what you're really saying is that you're not going to have a lot of substantial contract revenue on the remaining 3 quarters of the year?

[Mark E. Saad:]

We had about $500,000 of BARDA contract cash revenue in Q1. We've guided we'll have about $3 million for the year.

[Jason Kolbert:]

In just BARDA, not including the development-related party revenue or other development revenue?

[Mark E. Saad:]

That's additive. Focus just on BARDA.

[Jason Kolbert:]

But then how do we get to $15 million? Because if I add those numbers up, I start to exceed $15 million.

[Mark E. Saad:]

We were specific in the guidance that it's product revenue and cash contract revenue. Part of it, the cash contract revenue. The other development revenue is outside of that.

[Jason Kolbert:]

Got it. So let's switch gears a little bit, talk about clinical trials. As we start to talk about ATHENA in the U.S. and that enrollment, you've ticked down from 6 sites to 5 sites. Can you give us any idea about how many patients have been treated so far?

[Marc H. Hedrick:]

I think we will continue as a company to stick to a policy of really -- I think at the end of the year, we could tell everyone where we are, but we'll let you know when we get that trial done. We'll give you general qualitative statements about whether we're on track based on our guidance to get through that trial from an enrollment perspective this summer. We clearly think we will and -- but...

[Jason Kolbert:]

You can understand where I'm going, Marc. Because it's May, right? Why even bother to add another site in May if there's 12 weeks left, which puts us June, July, August? I mean, it sounds to me like how many patients could you be expecting from a new site to bring online at this point. So you must have a pretty good understanding when you say we're going to be done by this summer that you're going to get there?

[Marc H. Hedrick:]

We think we can get there with 5 sites exactly.

[Jason Kolbert:]

Okay, can we talk just a little bit about endpoints and how things are shaping up as you start to think about what will be required to move to the next phase, which along the PMA pathway would be a pivotal trial? Any idea as about how that trial might shape up size, duration, and what you might use for an endpoint?

[Marc H. Hedrick:]

We -- I have a lot of ideas. And we, as -- given where we are with ATHENA, that is a very active discussion that we're having right now. So I assure you that's front and center of what we're thinking about, given the trajectory that we're on. However, I think it's premature right now to discuss what a potential follow-on trial on the U.S. might look like. But we're looking, not only at previous studies we performed with our cell type, but we're also looking at other cell therapy companies and their data. And all of that will be -- we'll put into the mix as we design this follow-on trial that we hope to do.

[Jason Kolbert:]

And the last question is a business model question. If we fast forward to 2016, what do you anticipate the business model is going to look like? Will wrapped up in consumables be kind of a use fee every time I use the device? Any idea in terms of how this will work out? Particularly given the fact that you're placing systems all over the world now, right? You're creating the infrastructure. So how do you go about capitalizing it once you have a therapeutic approval that's based on a significant amount of your own invested R&D to recapture that later?

[Marc H. Hedrick:]

Yes, that's a great question. And is it -- is everything crystal clear and dialed-in today? No. But we know an awful lot. And let me just review a few things that we know. The first thing is the capital equipment component. Get it to a business place where the capital equipment issue is a nonissue we think is very important. In other words, moving towards a pure consumable economically considerable base-driven model is important. And that's the benefit of the BARDA agreement and the next-generation system that we are making a lot of progress on, and I think that largely accomplishes that goal. The second thing is the economics will largely be driven on a per-patient basis, which is built around the consumable for cardiovascular perspective. We've, as you know very well, we've said that kind of $8,000 to $10,000 per consumable feels like the right price, given the fact that these patients probably, and in a more significant heart-failure side with multiple readmissions to the hospital, chew up about $150,000 or more in resources per year for readmissions to the hospital. Think that, that consumable price is very good. And at our margins, we kind of ended it into the 80% to 90%-plus margins given that consumable bundle on a per-treatment basis. And that's not even calculating in potential re-treatments. So that would be the pharmaco economic data that we derive from our study will be geared towards making that value proposition. And I'd just say, recently, I had noticed that a peer company had talked about their pricing curve per treatment for a particular patient course of cell therapy, and it was on the order of about $200,000. So we think that $10,000 per-treatment cost to the provider is incredibly realistic and doable.

[Jason Kolbert:]

Absolutely, I agree. But I -- just one last question, which is the consumable package that'll be used for heart failure or in this case, CMI, you won't be able to switch to a different consumable. I guess the consumable packages will be built around the indication. So if you're during heart failure, you use one consumable package. And if you're doing breast reconstruction or you're doing burns, it might be a very different consumable package with different price points, is that correct?

[Marc H. Hedrick:]

Yes. I -- Jason, I could not have answered your question any better than you just did. So that's exactly right. So we'll -- this will be fully differentiated, approved specifically by FDA. And because there's no CapEx, I think that ought to really drive penetration.

[Operator:]

Your next question comes from Kaey Nakae of Ascendiant.

[Kaey T. Nakae:]

A couple of questions about the Olympus joint venture. I guess, initially, what does this require on your part, logistically?

[Christopher J. Calhoun:]

Well, hi, Kaey, it's Chris Calhoun. I mean, first on partnership, that's really been more on the development of the next-generation system that is very different than the one that we're developing now with BARDA. So the system that was developed through the Olympus-Cytori joint venture is actually -- was really developed as a cardiac system. And all the bells and whistles are very big very expensive piece of equipment that we are listing not to manufacture. We've taken that technology in a lot of the advancements that were designed into that, miniaturized them, and really built them entirely into the new platform, the smaller kind of tabletop design that we have. But we take the -- secondly, the cost of goods of that system, down from probably close to $100,000 with the Olympus partnership down to somewhere in the order of $5,000 to $10,000 based on this new design that we have internally. So all of the equipment that's around the world today with the exception of the few systems that are involved in the ATHENA trial had been made, serviced, including all the consumables right here at Cytori. So we have the manufacturing, we have all the quality systems that we've got in audit going on right now that we do routinely. So all of those things are already in place, and there really isn't any new requirements for us to add new facilities or manufacturing capability. We really have that here. And the advantage of this next-generation system, beyond the economics, is that it provides us tremendous flexibility to -- by owning those rights, we can decide if we want to make systems ultimately based on usage and the economics, but regionally. So we might make them in places where we can bring the cost down that would be appropriate for those kind of markets.

[Kaey T. Nakae:]

Okay, great. And then, second, as it pertains to the potential payment options, either $4.5 million in 1 year, $6 million in 2 years, what type of factors going to the decision of how to do that. And if it's done, are those lump-sum payments? Or how should we think about modeling those out?

[Mark E. Saad:]

Yes, what we try to do when we negotiated this, and Olympus was actually very generous in trying to help us find a way to make this work, was we wanted maximum flexibility here. Particularly knowing that the next couple of years are really the critical time for us to get a transition from the investment that we've been making and the technology to a profit-oriented business model. So probably the next 12 to 18 months is probably the most critical for us in terms of cash. So what we wanted to do is to have as much flexibility with those payments as we could, that we would be able to determine based on the strength of our balance sheet how much we would -- we could pay or take that down. So the first is, we're paying about $220,000 up front, this comes from money that's already in the joint venture. So these are royalty payments that we have paid into the joint venture already for product royalties because -- that Cytori's making the products today, but the JV really has the rights. We paid royalties into the JV, which has effectively funded the JV over the last few years. So there's a couple of hundred thousand in there that's an existing balance that's jointly owned. But Olympus is allowing us to use that money to pay the upfront payment to them. And then quarterly, we'll pay a royalty of the same rate, effectively as we've been paying over the past on product sales that will, again, pull down that total amount of money we owe to Olympus. And then at the end of a 1-year period, a fiscal 1 year, so not a calendar year, but at the end of the 12-month period, if we choose, we can pay whatever that remaining balance is. Let's say it's $4 million or so, if we have the capital and the board decides that, that's the right use of capital, we'll pay that $4 million. If we decide to wait a year, then it'll be $6 million minus whatever those royalty payments have been up until that point. So it gives us flexibility when we pay it. Now the one thing that we designed in was that if we bring in, let's say, over $35 million from whatever the source of strategic partnership or a license deal, then Olympus can call us to go ahead and pay that $4.5 million and be out of the liability.

[Kaey T. Nakae:]

Okay. That was helpful. And I think everybody's happy to see you resolve that partnership. And then finally, just a brief question on Puregraft. I know this doesn't amount to a lot of revenue, but you did talk about it being at a record amount. Are we talking tens of thousands a quarter, hundreds of thousands a quarter? Can you give us a sense of order of magnitude for that?

[Clyde W. Shores:]

It's Clyde. Yes, I think we could say it's in that north of a hundreds of thousands, globally. Just to give you an example, Q1, probably our record quarter, we treated about 1,500 patients. And what we're excited about toward the end of the year is launching this line extension, which would allow us to address a much larger market than we compete in today. Today, we're really getting a percent of the overall, just general fat grafting market, where we're really competing against homebrew methods for distilling the fat. And in this new opportunity, will be really addressing the large, small-volume filler market, which is on the order in the United States, about 2 million procedures a year, about 2-million-plus procedures in the EU G5. So we got kind of market opportunity and we think we've got a great product to address it. We see significant outside on Puregraft toward the end of the year.

[Operator:]

Your next question comes from Marco Rodriguez of Stonegate Securities.

[Dan Trang:]

This is Dan Trang sitting in for Marco Rodriguez. I know you've gone over the Olympus joint venture. Kind of wondering what was the reason behind that, knowing you just went through a capital raise not too long ago. I just wanted to know what was the thought process there.

[Christopher J. Calhoun:]

This has been something that we've been negotiating for approximately 18 months or so, and it's really more of a strategic decision on both fronts. One on ours to regain those rights around the manufacturing rights of the technology, we think those are valuable going forward. It gives us flexibility to develop this next-generation system, the smaller system, which is really subject to the BARDA contract and to be able to regain those margins as we're now getting these products out into the market, we could leverage that. And I guess the opportunity really came up about 18 months or so ago when Olympus underwent some of the issues that they've had, and they've fundamentally had to change their strategy. And really, that allowed us to effectively, per pennies on the dollar, regain those rights that they had put a significant amount of money into. So I'd say it was as opportunistic as anything else, but it really fits in our strategy of controlling these core critical chain items, and then grabbing the margin from that.

[Dan Trang:]

Okay, yes. And kind of a -- just broad question more directed towards Mark Saad. I know you mentioned that gross margins have been lumpy in the past and we can all see that. I'm kind of wondering as to any idea about when they might stabilize.

[Mark E. Saad:]

Sure, Dan. I think if you look at year-over-year, we're saying that from a total revenue, a total product and cash contract, we're going from $9 million to $15 million this year. You take out the cash contract, you're going from $9 million to $12 million. And if you -- we don't have a 4-year plan off of that. We certainly think the growth can accelerate based on what's been happening in the spring that's been coiled effectively for so many years that's reaching a pivot point. But if you were to look at the quarters where we exceeded $2 million, $3 million in revenue, I think you consistently see mid-50s, low 60s to mid-60s on the gross margin line. And by definition, if we're hitting that full year goal and then entering '14, I think you're going to see that gross margin certainly in the second half of the year bump up a lot. And then from where the business stands from a growth and product mix point of view come Q1 2014, our objective is to increase the predictability through consumables, of course, and at what time are you going to see most of those revenues come from consumables versus systems. We're just not there yet, but that's the key, and I think, to predictability. So the benefit of being where we're at is a lot of revenue to get in this first phase of getting hyper-proprietary systems out to markets where we've got approval. We got a long run way to get that done, but the transition point to predictability is all about the consumables. So admittedly, we're not there yet. But at a minimum, if you could see that revenue from the overall business getting to $2 million, $3 million, $4 million per quarter, and obviously, we think it should go much more from there, that's when you're going to see the fundamentally higher margin levels.

[Operator:]

Your next question is a follow-up from Yale Jen of Roth Capital.

[Yale I. Jen:]

Just a little bit in terms of the precise data publication -- the long-term data publication, do you guys have any more color in terms of the timing of that might be?

[Marc H. Hedrick:]

Yale, it's Mark. No, it's -- I think it's coming. It's -- we're in process with the journal and hopefully soon, but no specific update at this point.

[Yale I. Jen:]

Could there be a second half of this year? Or you could be even in years?

[Marc H. Hedrick:]

I think it could be second half of the year, yes.

[Operator:]

At this time, there are no further questions. I would now like to turn the floor back over to Chris Calhoun for any additional or closing remarks.

[Christopher J. Calhoun:]

For more than a decade, there's been much discussion around the hope and promise of regenerative medicine and cell therapy. Cytori's uniquely delivering on that promise today, improving the lives of thousands of patients around the world. With validation and support of hospitals and governments, Cytori's technology is at the epicenter of this innovation in this emerging new field in medicine. As a company, we're expanding our platform and our markets, more efficiently utilizing capital and driving toward profitable revenue growth, and ultimately toward a highly profitable and high-growth company. We want to thank you for your interest and your support for our company and for your time today. Thank you very much.

[Operator:]

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.