Cytomedix Q4 2013 Earnings Results Conference Call Transcript (Presentation)

Cytomedix undertakes no obligations to revise or update any statements that reflect events or circumstances after the date of this conference call.

I’d now like to turn the call over to CEO Martin Rosendale.

Martin Rosendale – CEO

Thank you, Michael. Good morning everyone and thank you for joining us. I am Martin Rosendale, Chief Executive Officer of Cytomedix. First of all, this morning, we are very pleased to announce that we have entered into financing agreements with the Deerfield Management Company and the Anson Group. Under the terms of the Deerfield financing, they are providing us with up to $35 million in funding under a convertible debt financing. This facility provides us with an initial draw of $9 million at closing and we will receive a further $26 million monthly… have received authorization by our shareholders to increase our authorized capital stock at a special shareholder meeting.

The tranche structure of this financing will also allow the company to evaluate the RECOVER-Stroke study data and under specific circumstances related to the study results allow the company to elect to pursue alternative financing options in lieu of taking the second tranche.

Concurrent with the Deerfield financing, the Anson Group has agreed to provide an additional $2 million in equity funding. This financing arrangement in total gives us the resources to execute on our plan of building a profitable and successful commercially focused wound care business through 2015. We’re happy to have Deerfield as a partner and encouraged by the confidence both Deerfield and Anson have shown in the potential of AutoloGel. Steve will provide more details in his discussion later on.

Regarding AutoloGel, our main focus is now the commercial launch of our wound care product under the Coverage with Evidence Development program. The AutoloGel system is our proprietary point of care device for the production of the platelet-based bioactive therapy for the management of wounds. It’s been cleared by the FDA for use at a variety of existing wounds and we are in the process of launching it now with Medicare coverage and sufficient payment into the estimated $3.4 billion US chronic wound market.

We had to go through a fairly lengthy process to get the appropriate reimbursement coverage but we are pleased with the final decision by CMS in November 2013 regarding payment regulations for the hospital outpatient prospective payment system and the Medicare physician fee schedule.

To remind you, coverage with evidence development or CED is a program under which CMS agrees to provide reimbursement for certain products and services such as AutoloGel while at the same time generating additional clinical data to demonstrate the impact of health outcomes.

The reimbursement code assigned to AutoloGel under the CMS final decision allows for reimbursement at a national average rate of $411 per treatment. The payment decision which came into effect on January 1 this year significantly expands the coverage for AutoloGel and allows providers in the outpatient setting to treat a broad patient population with a variety of wounds. We believe these outcome provide Cytomedix with a substantial and economically viable business opportunity and we are now in a position to sell AutoloGel into this market at attractive gross margins.

For the Medicare physician fee schedule which covers AutoloGel used in physicians’ offices and which represents a separate market from the outpatient setting, the final payment rule was consistent with those initially proposed by CMS in July of last year.

The Medicare administrative contractors or MACs have been directed to set the payment rates for claims for AutoloGel based on the claims and invoices that are submitted by healthcare providers. This effectively allows the individual contractor to determine the level of reimbursement.

With favorable reimbursement in place and the ample financial resources we are now in a position to undertake a major launch in wound clinics. We’ve begun treating Medicare patients and our current focus is on completing the CED requirements. Our launch strategies are focused on key high density markets that we believe will offer the greatest revenue generating options. We have been recruiting for and building out our commercial team to support market requirements and CED activities.

You will see that we also issued a separate press release last night announcing two key strategic management hires. Dean Tozer who was coming on board as our chief commercial officer and Jennifer Linsky who is our senior director of national accounts. You should expect further additions and announcements in the future.

Dean has been consulting for Cytomedix for about six months now and we’re very excited to have him join us full-time. He is an accomplished healthcare executive with a particular expertise in wound healing and a proven track record of launching products in that space. He spent five years with Advanced BioHealing where he led the acquisition and relaunch of Dermagraft and was responsible for the reintroduction of that product into the US wound care market. Within just a few years of launch, Dermagraft achieved annual US sales of almost $150 million prior to being acquired by Shire. We feel very fortunate to have Dean join our team. We think he is one of the top people nationwide in wound care and we see him playing a pivotal role in building our AutoloGel business and establishing the brand.

Following Steve’s review of the financials, Dean will take a few minutes this morning to provide some additional commentary on what he sees as the market opportunity in wound care and our plans for AutoloGel.

Jennifer Linsky, our senior director of national accounts has more than of 16 years experience in sales and marketing. She also brings to us a very strong background in wound care having recently spent five years at Shire Regenerative Medicine where she launched a successful business development and disease management program aimed at diabetic wound market.

Turning now to our Bright Cell technology program. We announced in January that we had completed enrollment of the RECOVERY stroke trial, a landmark study of ALD401 cells used to treat ischemic stroke. Based on an interim reciting analysis that we conducted at that time we concluded that the trial is adequately powered based on prespecified assumptions at an enrollment of 48 patients.

Specifically this analysis determined that the trial was adequately powered to demonstrate a clinically appropriate difference in the primary efficacy endpoint. We stopped screening or enrolling in new patients with that announcement and look forward to announcing topline results in May this year. We announced last year a strategic reorganization of our R&D operations and with this trial now fully enrolled our financial obligations to this study and the program have been substantially reduced. We are continuing to investigate various potential options for maximizing the value of the Bright Cell technology and we will keep you updated once the clinical data is released.

We also announced last year the decision to license our Angel concentrated PRP system to Arthrex, a greater than $1 billion revenue company and an established leader in developing and marketing products for the orthopedic market. We received a $5 million upfront payment at the time and importantly we still retain a commercial interest in Angel through a royalty from Arthrex.

Arthrex is now at the advanced stages of preparing a full scale launch of Angel and highlighted the product at the recent American Academy of Orthopedic Surgeons Meeting in New Orleans. We would encourage investors to visit the Arthrex website where you can see some of the new promotional materials they have prepared. We entered into this partnership with a goal of accelerating growth of this best in class product. We remain confident that Arthrex is the right partner and we expect more potential in growing royalty contribution as the launch momentum picks up.

Now I’d like to turn the call over to Steve for an overview of the quarter. Steve?

Steve Shallcross – Chief Financial Officer

Thanks, Marty. I will first discuss the fourth quarter and full-year financial results for 2013, then provide more details on the terms of the financings with Deerfield and Anson that we announced last night.

Total revenues were $3.5 million in the quarter ended December 31, 2013 compared to $2.1 million recognized in the same period last year. The increase is primarily due to an increase in Angel product sales of $0.9 million. Also during the quarter the company recognized $0.3 million of Angel royalties, $0.1 million of Angel license fees, $0.1 million of related transition services revenue.

AutoloGel sales for the quarter were $0.2 million. As we continue into 2014 we expect our pass-through sales of Angel centrifuges and disposable products to mirror Arthrex sales performance with a negative gross margin impact of these sales to be offset by an increased and related royalty revenue.

Overall gross margins decreased to 14% from 48% for the quarter. This compared to the same period last year. The decrease is primarily due to the sale of centrifuges and disposable products under the Arthrex agreement signed last year.

Although the cost of the company’s product has remained constant, the contractual selling price of Angel disposable products to Arthrex is significantly lower than the historical average. Furthermore the negative impact on gross margin is primarily the result of the generally accepted accounting principle requirement to record revenues and cost of sales related to Angel product sales on a pass-through basis.

In the future we expect to realize the economic benefit from the Arthrex license agreement in the form of quarterly royalty revenues. We also expect future reported gross margins to recover as the launch of AutoloGel in wound care space give us momentum and these related sales begin to account for a more significant portion of overall revenues. Current and future arthritis royalty revenue will have no associated costs.

Finally the decrease in margin for the quarter was partially offset by gross margin realized from licensing fee, royalty and other revenues.

For a detailed explanation on the profitability of product sales and the impact of the Arthrex agreement, I would refer you to the tables published in our Form 10-K filed with the SEC yesterday.

Total operating expenses in the fourth quarter were $4.3 million compared to $4.6 million in the fourth quarter of 2012. Salaries and wages in the fourth quarter were $1.3 million compared to $1.5 million reported last year. The decrease is primarily due to lower bonus expense of $0.3 million.

Consulting expenses were $0.6 million compared to $0.5 million reported in the same period last year. The increase is primarily due to higher expenses related to CED protocol development and CMS reimbursement items.

Professional fees were $0.3 million compared to $0.2 million reported in the same period last year. The increase is primarily due to legal costs related to fourth quarter financing activities. RD& expenses were $0.8 million compared to $0.9 million reported in the same period last year. The decrease was primarily due to lower design costs related to Angel products and lower clinical trial expenses.

General and administrative expenses were $1.4 million compared to $1.5 million reported in the same period last year. The decrease is primarily due to lower franchise taxes, stock based compensation expense and Angel sales commissions. This is partially offset by an increase in recruitment fees and outside administrative service costs.

Other expenses for the quarter were approximately $1.1 million compared to $0.2 million reported in the same period last year. The difference is primarily due to non-cash charges for a change in the fair value of derivative liabilities and a net increase in interest expense and debt issuance fees related to various financing activities in 2013.

We reported net loss to common stockholders of $4.9 million or $0.05 per share for the quarter. This compares to a net loss of $3.8 million or $0.04 per share in the prior year.

Turning briefly to the operating results for the 12 months ended December 31, 2013. Total revenues were $11.6 million compared to $10.6 million in the same period last year. The increase is primarily due to $2 million and higher Angel product sales, the recognition of one time nonrecurring revenue related to the sale of $1.3 million in existing placed Angel centrifuges to Arthrex made pursuant to the terms and provisions of the Arthrex agreement and $0.5 million higher royalty revenue. This was offset by a decrease in 2012 license fee revenue of $3 million. AutoloGel sales for the full year were $0.6 million.

Overall gross margin decreased to 27% from 63% for the 12 months ended December 31, 201 as compared to the same period last year. The decrease is primarily due to the approximately $3.2 million in licensing fee revenue recorded in 2012 that had no associated costs, sale of products under the Arthrex agreement and at a contractual selling price significantly lower than historical average, and the sale of existing placed Angel assets to Arthrex at book value.

Total operating expenses for 2013 were $21.2 million compared with $19.5 million reported in 2012. The company reported a net loss of $20.2 million or $0.20 per share for the 12 month period ended December 31, 2013 compared to a net loss of $19.8 million or $0.24 per share in the same period last year.

Cash used in operating activities for the 12 months ended December 31, 2013 was $11.4 million. Cash and cash equivalents were approximately $3.3 million at December 31 2013 and there were approximately 110.8 million shares of common stock issued and outstanding as of March 10, 2014.

Finally, I will give you an overview of the financings announced last night with Deerfield and the Anson. Last night we announced that we entered into a financing agreement with Deerfield Management Company. Under the terms of this agreement, Deerfield has agreed to provide to the company up to $35 million through a senior secured convertible debt facility with a conversion price of $0.52. The commitment will be funded into separate tranches. Deerfield has initially provided $9 million at the closing of the transaction and will invest an additional $26 million after shareholder approval to authorized the additional shares of the company’s common stock required for the potential conversion of the no warrant fees and interest under the agreement. The facility will be due in full on the fifth anniversary of the closing and structured as a convertible note which bears interest at 5 3/4% per year. Interest is payable quarterly in arrears in cash or the company’s election after the second draw and registered shares of the company’s common stock.

In connection with this facility we will issue seven year warrants to the purchased shares of the company’s common stock at $0.52 per share. We will subject to certain performance requirements and customary covenants as well.

We also announced last night that the Anson Group has agreed to provide for $2 million equity investment. Under the terms of the financing agreement, Anson agreed to purchase approximately 3.8 million common shares of the company’s common stock at $0.52 per share. Anson will also be issued 5 year warrants to purchase approximately 2.9 million common shares of the company’s common stock at an exercise price of $0.52 per share. In addition, Anson agreed to execute a lock up agreement and will be subject to sales restrictions under the agreement.

Also concurrent to the Deerfield and Anson financings, the company paid approximately $3.8 million to extinguish the secured debt, including accrued interest and fees owed to MidCap under the February 2013 note, therefore fully discharging its obligations. In addition, all except one of the holders of the company’s outstanding $3 million, 10% subordinated convertible notes purchased in the December 2013 private placement converted their notes and accured interest to approximately 6 million shares of common stock.

Net proceeds from these initial fundings and related activities of approximately $6 million will be used primarily for expanding the commercialization capabilities of the company and specifically the launch of AutoloGel. Please refer to the company’s Form 10-K filed with the SEC yesterday for the complete disclosures related to these financing transactions.

Now I would like to turn the call over to Dean.

Dean Tozer – Chief Commercial Officer

Thanks, Steve and good morning everyone. Marty asked me to spend a few moments this morning to introduce myself, explaining why I chose to join the Cytomedix team and finally review the opportunity I see – for the commercial product AutoloGel.

So first, let me share a little bit of my background. I started my career in healthcare with Dupont [consult] pharmaceuticals and during my 10 years in the global pharmaceutical industry I held positions in accounting and finance, sales, corporate strategy, international marketing and international assignment in Japan.

In 1999, while in Japan, I made the decision in lieu of pharmaceutical industry and moved back to the United States. Once back in the US, I started my own consulting practice in which I worked with startup biopharmaceutical companies to help them formulate their commercial strategies and plans for launching or improving the sales performance of the commercial stage products.

After six years of successful independent consulting, I was asked by a [major firm] to assist with diligence on a potential acquisition of… wound care product being divested [indiscernible] that product was called Dermagraft. And for those of you who are not familiar with Dermagraft, it is a bio-engineered tissue product used in treatment of Diabetic foot ulcers and commonly referred to as a skin substitute, or an advanced wound care product.

My role in that diligence effort was to assess whether that product Dermagraft could be relaunched in the US market, if so, how could that be done successfully? I am happy to say we did see a commercial pathway for re-launching and I was fortunate to be one of the executives who helped create and lead Advanced BioHealing from 2006 to 2007. In ABH, I led a number of commercial functions within the company.

In 2011, we had grown the company to approximately 500 employees with Dermagraft sales approaching a 200 million annual run rate basis. We were able to create significant shareholder value with the sale of ABH to Shire Pharmaceuticals in 2011 for $750 million. Incidentally we closed that transaction just four hours before we were to publish our IPO.

From the acquisition until June of 2013, I was instituted by Shire the VP of Corporate Development for the Regenerative Medicine division. In October of last year I joined Cytomedix as a consultant to help formulate the commercial buy of AutoloGel.

So now why have I joined Cytomedix full time? I think if I distill it down to one word it would be opportunity. I see tremendous opportunity for AutoloGel, much like I saw with Dermagraft in 2006. The first reason is that I believe AutoloGel works. There is compelling clinical data and enough practical experience with product for me to know that it worked.

Given that the need in wound care to treat chronic wounds continues to be overwhelming… even with continued advancements in treatment options the market need for efficacious product like AutoloGel still is great.

…………….

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