ThermoGenesis Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 14 Aug 2018

[Operator:]

Good day everyone. And welcome to the Cesca Therapeutics Conference Call and Webcast to review Financial and Operating Results for the second quarter ended June 30, 2018. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation [Operator Instructions] This conference call is being recorded. I would now like to introduce your host for today's conference, Paula Schwartz of Rx Communications. Please go ahead.

[Paula Schwartz:]

Thank you, operator. This conference call contains forward-looking statements within the meaning of the Federal Securities Laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that might cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. The information presented today is time sensitive and is accurate only as of the date of this conference call, August, 13, 2018. If any portion of this call is being rebroadcast, retransmitted, or redistributed at a later date, Cesca will not be reviewing or updating this material. Participating on today's call are Dr. Chris Xu, Chief Executive Officer; Joe Balagot, Senior Vice President of Corporate Development

[Chris Xu:]

Thank you, Paula. Good afternoon everyone, and thank you for joining us. I will start by providing a strategic and operational update. Then Joe will review our recent business and corporate development activities and after which Jeff will wrap up with a summary of the finance. We will then take your questions. During the second quarter, we continued to pursue our strategic vision of the company which is to be the full service partner of choice within the field of cellular therapy research and development with an emphasis on CAR-T. CAR-T is perhaps the most meaningful advance in cancer treatment today. In fact, this fact is confirmed by a significant investment in CAR-T research currently underway. In addition to the two FDA approved therapies currently on the market, Gilead’s Yescarta and Novartis' Kymriah. There are literally 100s more currently being evaluated in clinical studies mostly in the U.S. and China. With our CAR-TXpress platform which can automate key steps in this complex process, we believe we can play a significant role in expanding and accelerating the availability of these life saving therapies while creating value for our shareholders. CAR-T therapies are complex and costly to manufacture with dozens of labor intensive step spanning days if not weeks and since each treatment is unique manufacturing these therapies at commercial scale continues to be a significant challenge to the early commercial pioneers. A challenge further compounded by the fact that manufacturing specification for commercial production of CAR-T's treatment are often more stringent than in the clinical research setting. Just last month, a major CAR-T manufacturer disclosed on its quarterly earnings call that it is experiencing manufacturing problems related to the cell variabilities and viabilities that fall short of the therapy’s approved label resulting in a delayed patient treatment. This perfectly highlights one of the many, many issues that CAR-T manufacturers are facing as they look for expanding -- as they look to expanding capacity while maintaining the required consistency for these highly individualized therapies to be effective. This is where Cesca come in. Our functionally close semi-automated CAR-TXpress system is designed to significantly reduce the processing time and increase efficiency for the CAR-T cellular manufacturing process, specifically CAR-TXpress delivers a highly purified mixture of target cells with high recovery efficiency and cell viability rates relates to the current process. This technology is also flexible in that it can also easily adapt it to other genes or stem cell therapies. We see numerous opportunities to collaborate with pharmaceutical companies, medical technology companies, academic institutes and distributors. And as Joe will discuss momentarily initial discussion with potential partners have been productive. We hit a major milestone during the second quarter with the release of our first off the shelf kit the X-Mini for the research market. The X-Mini selection kit is a component of our CAR-TXpress platform. Following the release of X-Mini we have increased the level of our activity engaging with academic and industrial leaders to better understand the needs of the market and how our CAR-TXpress platform can meet these needs. Joe will elaborate on these developments shortly. Subsequently to the end of the second quarter, we also announced the commercial launch of our PXP system for rapid processing of our autologous peripheral or bone marrow derived stem cell in the point of care setting such as surgical center or clinics. The PXP system is based on the X Series platform and allows clinicians to rapidly achieve high stem and progenitors cell recovery rate, while addressing many of the short-coming of the competing system most notably RBC which is red blood cell contamination in the resulting cell concentrate. The launch of PXP was a natural extension of our X Series platform for this specific area of use and further solidify our positioning as a leader innovator in the field of cellular processing even as we pursue the very large market for CAR-T manufacturing and related services. Our legacy cord blood business continues to generate revenue and positive gross margin that supports some of our infrastructure as we continue to pivot our business towards high growth opportunities with our X Series products and CAR-TXpress platform. And now, I would like to turn the call over to Joe Balagot for an update on our corporate development activities. Joe?

[Joe Balagot:]

Thanks Chris. As Chris mentioned, the key highlight during the second quarter was the release of our X-Mini cell selection kit for the research market, and our increased activity engaging with industry and academia regarding the benefits of our CAR-TXpress platform. We also exhibited our X-series products for the first time in May at the International Society of Cell Therapy in Montreal. During ISCT, we also presented several abstracts demonstrating the value of our X-BACS and X-Wash technology and have additional publications and abstracts planned for the upcoming conferences during the remainder of this year. The early feedback we have received in response to this more aggressive outreach been very positive and is starting to generate not just sales inquiries but also orders which is highly encouraging especially given the fact this occurs in the absence of a direct sales force. Our X-Mini kit which we launched in the second quarter is based on our proprietary buoyancy activated cell sorting technology or BACS for short. As a reminder BACS employs microscopic bubbles to isolate a specific cell type from a complex mixture of cells such as blood using standard laboratory equipment. These micro bubbles bind to antibodies on their surface enabling them to bind specifically to a single desired target cell type. Through centrifugation, target cells float to the top of the host liquid while the non-target cells sink to the bottom. X-Mini allows researchers to experiment and familiarize themselves with micro bubble technology using our BACS reagents as opposed to using traditional MACS technology. The X-Mini isolates targeted cell subsets from blood and blood products and is the first of several off the shelf kits said Cesca's device subsidiary ThermoGenesis is developing for the research and development market of CAR-T and other cell-based therapies. The first X-Mini selection kit is designed for the isolation of the CD3+ T-cells from a starting population of peripheral blood mononuclear cells or PBMCs. To provide the flexibility to allow users to select any cell population for which they have a primary antibody. We have received valuable market feedback from potential customers and distributors and are now planning to develop several different X-Mini kits to address cell types beyond CD3+ T-cells such as CD34, CD4 and CD8. We aim to launch those kits Before moving on, I do want to note that under the evaluation agreement that we announced with the University of North Carolina, Chapel Hill, we successfully completed our demo and materials transferred to them during the second quarter. We think that our X series of technology will provide UNC with improved manufacturing efficiencies and look forward to seeing the results of the UNC evaluation, which will hopefully be published in an upcoming journal because we don't -- do not control the publication schedule we will not be providing any updates on this evaluation until UNC publishes their results. That said, we are highly encouraged by the potential of our technology based on the results of our demo day with their team last quarter. Now moving on, initial commercial sales of our X-LAB and X-Wash systems closed subsequent to the end of the second quarter and will therefore be reflected in our third quarter results. As I alluded to a moment ago, these first sales are notable as they occurred despite our lack of a direct sales force coming instead via word of mouth and right after our first formal product exhibitions at key cell therapy conferences. This activity is encouraging because these conferences were the first opportunity that potential customers and collaborators had to kick the tires and those sales are just beginning, it seems that the value of our products are resonating. As an aside, we were recently told that an article authored by our Chief Technology Officer, Phil Coelho, which appeared in the April edition of cell and gene therapy insights entitled "Driving CAR-T manufacturer optimization through technology innovation" was downloaded more time than any other article in the publication. Phil is a leader in the field and we view this as another indication of the momentum that is being generated. That said, we are working diligently to build upon the awareness we have established to-date. As we prepare for the commercial release of additional X series products, I am pleased to say that we are in advanced discussions to partner with a leading global distributor of laboratory products and life sciences technology, so that we can be flexible and meet the needs of CAR-T developers wherever their clinical trial sites or manufacturing facilities happen to be located. As Chris mentioned in his opening remarks, CAR-T Therapeutics are extremely complex to manufacture and this fact contributes to their high cost, which can range from $373,000 to $475,000 per dose. Also the highly personalized nature of each therapy significantly limits the ability to manufacture these drugs at scale, high cost and low capacity, therefore, stand a significant barriers to the more widespread availability of these new immunotherapies. It's fair repeating that Cecsa's modular CAR-TXpress platform is designed to allow researchers and drug developers to automate one or more key steps in the manufacturing process leading to faster manufacturing time and lower costs, while at the same time improving cell yields and consistency. With industry needs in mind, we are actively pursuing further automation of CAR-TXpress and plan to engage with one or more development partners to help support this project. As we discussed on last quarter's call, in March of this year, we expanded into higher value contract development and manufacturing or CDMO for short services through a license agreement with China-based IncoCell Tianjin Limited. China is second only to the U.S. in terms of the number of CAR-T clinical trials currently underway. And this exclusive agreement positions us as a key player in that large and growing market. I'm pleased to say that our work with IncoCell is progressing as planned and we are pursuing additional CDMO collaborations in other important territories including the U.S. as we view CDMO as a key to our long-term success. At this point, I'd like to provide a brief overview of our current product portfolio beginning with our legacy products which include bio archive for the cryogenic storage of cellular products, AXP for the isolation collection and storage of hematopoietic stem cell concentrates derived from cord blood and peripheral blood and PXP for the autologous processing of bone marrow cells in the point of care setting including surgical centers and clinics. In addition given that our growth strategy is focused on the CAR-T market, I'll just take a moment to highlight our semi-automated functionally closed X Series product offering which includes X-Mini for research use only. X-Mini employs micro bubbles to isolate target cells through buoyancy activated cells sorting. These kits allow researchers to experiment with micro bubbles as an alternative to magnetic beads separation. X-LAB for cell isolation. X-LAB is a ficoll-free system for the rapid isolation of target cells from sources including blood samples, bone marrow aspirates and leukopheresis products. X-WASH for washing and reformulation; X-WASH separates washes and volume reduces frozen cells or cell cultures to a programmable volume. This broad portfolio of solutions coupled with our CDMO capabilities provide Cecso with the flexibility to meet the needs of many different constituents within the CAR-T industry as well as the broader immunotherapy ecosystem. As noted on last quarter's call, our early discussions with potential partners have been productive and we look forward to providing more specifics on future calls. We are proud that Cecsa remains a pioneer in the development and commercialization of automated technologies for both cell-based therapeutics and bioprocessing providing the market with a portfolio of products that are for distinct advantages including handsfree operation, high volume processing and recovery rates are among the highest in the industry. The most recent introduction of PXP and CAR-TXpress reflect a continuation of our top-tier position in the field. In closing, I believe the progress that we have made in recent months sets us up for a transformative year ahead. And with that, let me turn the call over to Jeff for more detailed review of the financials. Jeff?

[Jeff Cauble:]

Thank you, Joe. Net revenues for the three months ended June 30, 2018 were $2 million compared to $3.5 million for the comparable period of 2017. The decline in revenues was the result of lower AXP cells due to the distributor change in China lowered by our archive device cells and the termination of the royalty payment agreement in the prior year. Gross profit for three months ended June 30, 2018 was $363,000 or 18.1% of net revenue as compared to $1.5 million or 43.6% of net revenue for the comparable period of 2017. The decline in gross profit, but due to lower sales, higher overhead costs resulting from the acquisition of SynGen and inventory scrapped expenses due to discontinuing sales of two low volume products. Additionally, prior year gross profit margin percentage was higher due to the reversal of inventory reserves for products sold. Sales and marketing expenses for the three months ended June 30, 2018 are $359,000 as compared to $421,000 for the comparable period in 2017. The decrease was due to reduced headcount and bad debt expense in the company's [indiscernible] clinical subsidiary in the prior year. Sales and marketing expenses in the company device segment were consistent in both periods. Research and development expenses for the three months ended June 30, 2018 are 908,000 as compared to $566,000 for the comparable period in 2017. The increase was due to additional headcount expenses related to the development of the company's CAR-TXpress platform and a shift in existing personnel from the clinical development segment to the device segment as the company is minimally funding clinical development products until a strategic partner is identified. General and administrative expenses for the three months ended June 30, 2018 were $2.4 million as compared to $2 million for the comparable period in 2017. The increase was driven by severance expenses and legal dispute settlement with the broker dealer. During the second quarter of June 2018, the company incurred impairment charges of $27.2 million as compared to impairment charges of $310,000 during three months ended June 30, 2017. The company performed a quantitative assessment which determined that the carrying amount of the company's goodwill and definite live intangible assets linked to its clinical protocols exceeded their estimated fair value. As a result, impairment charges of $12.7 million to goodwill and $14.5 million to intangible assets were recorded during the period. For the three months ended, June 30, 2018, the company recorded a comprehensive loss attributable to common stockholders of $26.6 million or $1.73 per share based on approximately 15.4 million weighted average basic and diluted common shares outstanding. This compares to a net loss of $1.1 million of $0.12 per share based on approximately 9.9 million weighted average basic and diluted common shares outstanding for the three months ended June 30, 2017. During the second quarter, we completed a public offering consisted of one share of common stock or one prefunded unit and one warrant to purchase one share of common stock for gross proceeds of approximately 5.5 million. At June 30, 2018, the company had cash and equivalents of $3.1 million and working capital of $5 million compared to cash and equivalents of $3.5 million and working capital of $6 million at December 31, 2017. That concludes our prepared remarks and now we'd like to open the call for your questions. Operator?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question today is from Sean Lee with HC Wainwright. Please go ahead.

[Sean Lee:]

Good afternoon guys. Thanks for taking my questions. My first question is on direct sales. In the prepared remarks you mentioned that you've been getting a lot of interest regarding the new product launches and you had some sales orders despite not having a direct sales force. I was just wondering, does the company have any plan to set up a direct sales force in the near term or would you depend more on distributors to promote these new products?

[Chris Xu:]

This is Chris and thank you for the question. So the answer for whether the company decides to start direct sell or through a distribution channel to market our CAR-TXpress or related products that answer is actually the company is considering both. Company is considering that the margin as well as the speed to market. So we are in different discussions and we are looking into the feedback from the market. So the good news is that as of this moment as we just start launching this product from a direct quote to the company we are already seeing a significant interest in the product and that refers the market need for such a product line. So we hope either through direct sell and market channel we will see a -- we are trying to build a significant market presence for these product line.

[Sean Lee:]

Okay. Thank you for clearing them. Do you have a timeline on when you would like to decide?

[Chris Xu:]

Joe, you want to take that?

[Joe Balagot:]

Yes. This is Joe. Let me take that. So we are actively as I said in my comments talking to a potential global distributor and those since last quarter have made substantial progress in that regard. I don't think at this point we're prepared to sort of predict when we might be able to close that transaction. But I can safely say that we've made progress. I think what or just to echo some of Chris's comments, I think we're somewhat surprised by the level of interest and the fact that we were able to generate some sales in Q3 already from our X Series products. So I think that's going to help us whether we decide to sort of go forward with the distributor or decide to go direct, but Q3 is looking pretty good as we stand today. And but I think as we said in the second or first quarter call, global distribution is definitely high on the list of potential options for us and we're pursuing that aggressively.

[Sean Lee:]

Okay. My second question is on the cGMP accreditation from the FDA. I understand that that's needed to move the X Series from research to a commercial setting. Could you update us a little bit on the progress towards that?

[Joe Balagot:]

Yes. I would say there's probably two different pieces to that. I'll just take a first crack at that. We think we may have alluded on a prior call that we're bringing in manufacturing. We originally were manufacturing some of our products through a contract manufacturer and we decided to bring that in and build a clean room and be able to manufacture our products under cGMP standards. I think probably the other part of your question might refer to the clinical setting when people like for example CAR-T manufacturers being able to use our product to manufacture product that we continue to work on. And the feedback we've gotten from some of the discussions we have with some of these key players is very strong interest to work together with us on figuring out what the best profile of product should be. So those conversations sort of have been happening over the last couple of months and hopefully some time on future earnings calls, we'll be able to report on how those conversations evolve, but I think positive thing we've heard from the market is that people are very eager to see how we can evolve our technology to meet the clinical needs. So that may result in a partnership and may not but we’ll let you know on future calls, once we are able to say something about it.

[Sean Lee:]

I see. Thanks for the additional color. That's all I have.

[Operator:]

[Operator Instructions] With no further questions, I'd like to turn the conference back over to Dr. Xu for any closing remarks.

[Chris Xu:]

Thank you for joining us this afternoon. Again, we are pleased with the progress that we have achieved and the momentum that we have maintained during the second quarter and through today. And we look forward to speaking with you again during our third quarter call in November.

[Operator:]

The conference has now concluded. We want to thank you for attending today's presentation. You may now disconnect.