Cytosorbents Corp (CTSO) 2018 Q3 法說會逐字稿

Good afternoon, and welcome to the CytoSorbents Third Quarter 2018 Financial and Operating Results Conference Call. (Operator Instructions)

At this time I'd like to turn the conference over to our moderator Jeremy Feffer. Please go ahead, sir.

Thank you, Jessica, and good afternoon. Welcome to CytoSorbents Third Quarter 2018 Financial and Operating Results Conference Call. Joining me today from the company are Dr. Phillip Chan, Chief Executive Officer and President; Vincent Capponi, Chief Operating Officer; Kathleen Bloch, Chief Financial Officer; Dr. Eric Mortensen, Chief Medical Officer; Dr. Christian Steiner, Vice President of Sales And Marketing from Germany; and Chris Cramer, Vice President of Business Development.

Before I turn the call over to Dr. Chan, I'd like to remind listeners that during the call management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. Any projections as to the company's future performance represented by management include estimates today as of November 6, 2018, and we assume no obligation to update these projections in the future as market conditions change.

During today's call we will have an overview presentation covering the operating and financial highlights for the third quarter by Dr. Chan and Ms. Bloch. Following that presentation we will open the line to your questions during the live Q&A session with the rest of the management team.

At this time, it's now my pleasure to turn the call over to Dr. Phillip Chan. Phil?

Thank you very much, Jeremy, and good afternoon, everyone. We were pleased to have achieved more than 51,000 CytoSorbents treatments delivered cumulatively from 31,000 a year ago. We achieved record trailing 12-month total revenue of $21.1 million, including record 12-month product sales of $19.1 million, with a mix of strong direct and distributor or partner sales in a total of 53 countries.

The company's well capitalized with a healthy cash balance of $24.9 million, as of the end of this third quarter, providing sufficient working capital into the second half of 2020.

We had blended product gross margins of 72% that are expected to rise now at full production in Q4 of 2019; this is from the new manufacturing facility.

During the quarter, we also debuted the per-life organ preservation system, with our partner Aferetica for organ transplant, which uses CytoSorbents' proprietary servant technology at the 27th International Congress of the Transplantation Society.

We also received a CytoSorb procedure code in Switzerland that is currently pending payment designation.

In terms of the clinical trial update, I'm pleased to announce good progress on our U.S. REFRESH 2-AKI pivotal trial. As you recall this is a 400 patient randomized controlled PMA, multicenter adaptive trial targeting reduction of postoperative acute kidney injury, using CytoSorb intra-operatively during complex cardiac surgery. The protocol amendment that we discussed in the previous earnings call was approved by the FDA in September, with subsequent approvals by the ethics committee at our clinical trial sites. The trial site feedback based upon the modified enrollment criteria has been that, it has -- is an easier protocol to enroll with more eligible patients. I'm pleased to announce that we have now enrolled 20 patients into the study, among 14 active clinical trial sites, with a total of 25 sites to be active in the near future. Because of this, we are expecting enrollment to accelerate in this study.

In terms of the REMOVE endocarditis trial that is being funded by the German government, as you recall, this is a 250 patient randomized-controlled trial that is evaluating the safety and efficacy of CytoSorb to improve organ dysfunction when used intra-operatively during valve replacement surgery for infective endocarditis. The first patient was enrolled in January, and now the trial has enrolled a total of 62 patients at 9 clinical centers.

There's a planned interim analysis in the first 50 patients, focused on inflammatory mediators such as cytokines, that is planned for the next several months.

Last, but not least, our HemoDefend pivotal trial. Recall that this a point of care filter that removes noninfectious contaminants from transfused packed red cells. The U.S. pivotal trial is designed to support U.S. FDA approval of HemoDefend for packed red blood cells and is expected to start in early 2019. And we've been working closely with National Heart And Lung Blood Institute, a division of NIH, to fund and prepare this study.

With that, I'll turn the call over to Kathy for our financial overview. Kathy?

Thank you, Phil, and good afternoon, everyone. For today's call, I'll provide an update regarding our third quarter 2018 financial results, including product sales. And in addition, I'll provide an update around our working capital and cash runway.

CytoSorb product sales for Q3 2018 were approximately $5.1 million, which represents a 48% increase over product sales of approximately $3.4 million for Q3 of 2017. This increase was driven by an increase in direct sales from both new customers and repeat orders from existing customers along with an increase in distributor sales. The decline in the euro had a negative impact on Q3 2018 sales, and I'll discuss this in more detail in a few moments. Total revenues, which includes product sales and grant revenue, were approximately $5.7 million for the third quarter of 2018, as compared to approximately $3.8 million for the third quarter of 2017, which is an increase of approximately 80%.

In Q3 2018, gross profit grew to approximately $3.7 million, an increase of approximately $1.4 million, a 61% increase over gross -- profit of approximately $2.3 million for Q3 2017.

Gross profit margins on product sales were approximately 72% for Q3 2018, which is up from 69% for Q3 2017, this primarily, due to year-over-year reductions in the cost of devices manufactured, as a result of production efficiencies we were able to achieve.

Turning now to our 9-months ended September 30, 2018, financial results. Product sales for 2018 were approximately $14.8 million, which is a 63% increase over product sales of $9.1 million for the same period of 2017.

Increases in direct and distributor sales are the major contributors to revenue growth, also aided by a stronger euro to U.S. dollar average exchange rate.

Grant revenue was approximately $1.6 million for the 9 months ended September 30, 2018, an increase of 16% over grant revenues of $1.4 million for the same period of 2017. And total revenues, which includes product sales and grant revenues, were approximately $16.4 million for the 9 months period of 2018, as compared to total revenue of approximately $10.5 million for the 9 months period of 2017, which is an increase of approximately 56%.

Now let's take a closer look at our quarter-over-quarter product sales. Q3 2018 product sales of $5.1 million were slightly below Q2 2018 product sales. And there were a number of factors underlying this slight reduction in quarter-over-quarter sales. First and more importantly, Q3 2018 sales were negatively impacted by a decrease in the euro to dollar exchange rate, the effect of which reduced Q3 2018 reported sales by approximately $178,000. In other words, if the exchange rate had remained unchanged from the first -- from the second quarter of the year, Q3 2018 sales would have been approximately $5.28 million or an increase of $35,000 over Q2 2018.

In addition, in the third quarter of 2018, despite record CytoSorb unit shipments, we had a higher percentage of distributor sales, which have lower margins and lower selling prices than direct sales, than in the second quarter of 2018.

And finally, many European businesses slow down in the third quarter due to summer vacations, not only by workers, but also customers in July and August, especially. Given the concentration of our business in Europe, we were surprised that this was really the first time -- the first year in which we have seen this slowdown impact our financial results to this magnitude.

That being said, our track record of 25 consecutive quarters of year-over-year sales increases remains intact. And most significantly, we believe, the underlying drivers of revenue growth remain strong and that our year-over-year growth patterns will remain consistent and strengthen in the future.

So turning to our trailing 12 months year-over-year product sales chart. Over the past 3 years, the company has experienced a 77% compound annual growth rate. And overall, our annual product sales growth exhibits a very strong growth trajectory and we expect that to continue into the future.

Now turning to working capital and our cap table. As of September 30, 2018, we remain very well capitalized with approximately $24.9 million in cash, which provides a solid foundation for the company. In the third quarter of 2018, we did utilize our at-the-market ATM equity facility with Cantor Fitzgerald. We sold approximately 40,000 shares at an average price of $12.66, which generated net proceeds of approximately $605,000. And as we said before, we believe the ATM provides an efficient and cost-effective way for us to raise funds for the company. We believe that the existing cash runway will allow us to meet our operating and clinical trial needs well into the second half of 2020.

Turning to our capital structure. As of September 30, 2018, we have approximately 36.4 million common shares on a fully diluted basis.

And with that, I'd like to turn the call back to Phil.

Thank you very much, Kathy. In addition to our prior guidance, that second half product sales will be greater than second half product sales. We have additionally refined our guidance, and expect that Q4 2018 product sales will exceed Q3 2018 product sales.

We also continue to expect solid growth in achievement of operating profitability in 2018 on a quarterly basis, less noncash expenses and clinical trial costs this quarter. We were, again, very close to achieving this objective in the third quarter of 2018, with an operating loss, as defined, of approximately $380,000. We anticipate expansion in blended product gross margins currently at 72%, as we scale up production from our new manufacturing facility.

That currently concludes our prepared remarks. Operator, please open up the call for the Q&A session.

(Operator Instructions) We will go first to Andrew D'Silva with B. Riley FBR.

Sorry, if I missed this one, I've been hopping between a couple of calls. But do you have any updates related to any of your investigator-initiated studies? You had about a dozen or so couple of quarters ago that were expected to publish, and I was wondering if you knew how the pipeline looks right now from that standpoint?

Well, the investigator-initiated studies continue. And in fact, we are starting new ones all of the time. If you look at pace of publication, you'll see actually a number of studies that are currently being published. These range from case series and from small randomized controlled studies. Some of these were started many years ago and only are getting published now as those studies have been completed and are finally getting to publication. But that pipeline of investigator-initiated studies continues to be robust and we continue to support those with scientific input and clinical input from our clinical team.

Okay, great. And then, I guess, 2 questions into one, out of the 53 countries that you noted that you distribute worldwide, how many have actually established product registrations thus far and are able to actually sell the product? And then, out of the 20 patients that you have in REFRESH 2, how many were enrolled after the protocols changed and the sites upped to this 14?

Yes, let me turn that over to Vince, to talk about product registrations. Vince, I don't know, if you could give a little color on that.

So on the product registrations, we're almost, I'd say, 90% of those countries are registered. Right now, the activity is bringing up, at least from our end, is in servicing those countries to do the training. And basically, bring the distributors up to speed. But that -- from that perspective, probably, about 90% of them are actually fully registered at this point.

And I think for the second question, I think the majority of the enrollments have been after the protocol has -- after the protocol amendment has been submitted and approved. So we expect that -- we had mentioned last time that a lot of the clinical trial sites were -- wanted to wait until the FDA actually approved the protocol amendment before aggressively enrolling. We did have 1 clinical trial site that was enrolling ahead of that using the new protocol guidelines, but they had already worked that through their system. So we expect that enrollment to accelerate, now that they have gotten the final protocol approved.

And we'll take our next question from Josh Jennings with Cowen and Company.

This is Brian here for Josh. I wanted to start with the products, so I understand the impact of the euro and the greater percentage of distributor sales. But can you discuss the reason your confident you're facing the modest amount of seasonality rather than something more company specific in Europe?

Yes, so maybe let me turn it over to Christian, to give some color on that. Christian?

I think the business in the vacation time is normally always a little bit slower. So this year, I think we've seen the first time that our business has been impacted by this more. So especially, like in surgery, a lot of elective surgery has been postponed because of vacation of doctors and surgeons. And this had an impact, especially in cardiac surgery. And also I think, the unusual hot summer in Central Europe had an impact on the number of patients, especially in the hepatitic field. But additionally, all of our analyzers of the business have shown that there is no other reason for the slower growth of the business. And so, other companies, I think, have seen the same picture in this field.

Okay. And for a follow-up, on REFRESH 2, the entries on clinicaltrials.gov suggest that there were just 2 amendments made to the protocol, including the removal of the H-cap that you discussed last quarter. So my question is, whether more than 2 changes made to the protocol? And I guess more importantly, does the amended protocol reflect the totality of what you proposed to the FDA? And by that I mean, the actual one you're working with now, does that reflect the totality of what you proposed?

Yes, that is correct. But let me turn it over to Eric, to give some more color on that. Eric?

Sure, Phil. So let me just speak. This is actually amendment D, but you have to keep in mind that some of the amendments are really more administrative really in mind. What we're really talking about that's really changed the Connectix study recruitment really reflects the change that we made in this last round, which, as you just noted: one, was a change of the H-cap; two, was that we also added in the well-established risk factor for AKI of obesity, which is a BMI greater than or equal to 30 kilograms per meter squared; and then, finally, I think it goes to just how much small changes in terms of clear up in your protocol can really improve this implementation. A large part of what we just did was to actually make it very clear to study coordinators, that we were looking at patients both with mild and moderate renal impairment baseline. And what we basically have seen is that, coordinators have a very limited period time to really evaluate patients on the intake the study -- their surgical OR listing. So very small change can really improve their ability to very rapidly identify the appropriate patients. So what we're really hearing, frankly, I'll give you just one quote from study coordinators. We've heard that we've gone from thinking that we had no qualified patients during prescreening, to seeing a majority of the case schedule now meets our completion criteria. So it really has made a very big change so that you can see that those 12 patients, just in about 1.5 month time, makes a big change from our previous rate of improvement.

We'll now take our next question from Jason McCarthy with Maxim Group.

So first I'd just like to see if you can provide a bit of an update with regards to May's label expansion into myoglobin and bilirubin, specifically related to any progress in uptake in those indications. And then, just more broadly, which therapeutic areas you consider the most important for driving growth in CytoSorb revenues going forward.

Yes, I think that the 2 major indications that we have currently are in sepsis. And so sepsis dominates the critical care applications that we currently have. And then in cardiac surgery, which represents about a quarter of all of our cases. It is our use of CytoSorb in various indications in cardiac surgery, either preemptively to help stabilize patients going in surgery, during surgery to help stabilize patients intra-operatively, for example, patients undergoing endocarditis surgery. And then postoperatively for patients who develop postoperative SIRS. In terms of the label expansion that we had that we announced earlier, this is something that we pursued because of the -- of the demand from physicians wanting to use our therapy on label for these particular applications. And so again, the addition of bilirubin removal added the ability to treat patients with liver failure, specifically as a liver dialysis therapy and to be able to treat them on label. And then, the addition of myoglobin to the label allowed us to help treat patients with severe crush injury and rhabdomyolysis, which is caused by muscle crush injury, which releases toxic myoglobin into the bloodstream that can accumulate in the kidneys and can cause kidney failure, which is an independent risk factor for death in trauma -- SIRS trauma. So we are seeing some initial good uptake in those fields, but I don't think that the real effect on our sales growth is being felt yet. I think this is still a developing area, but one where we think has -- but areas we think have tremendous opportunity for the company and for our CytoSorb technology. So I think that liver disease alone is a massive problem worldwide. It's estimated that 300 million people in China alone, for example, have some form of chronic liver disease. And just to be clear, the patients that we are treating are the patients who wind up getting acute exacerbations of liver disease and wind up in the hospital with decompensated liver disease or patients who get into acute hepatitis from alcoholism or other acute toxicity. So these markets are very big. We believe that it will complement our current -- the current applications that are -- where CytoSorb is already being used.

Okay, and just one more related to CAR T. I'd like to see if you'd go into a bit more detail on your plans for positioning CytoSorb in these patients with regards to CRS. And then also if you could possibly leverage data from REFRESH 2 in the U.S. and then only require small label expansion studies rather than full trials.

So for CAR T-cell immunotherapy we believe that this is a very high-profile area where a lot of money being spent and where there's a lot of optimism over the new treatments coming to market and the ones already approved on the market. Now Yescarta and Kymriah, one by Gilead and one by Novartis, are now both approved in the United States as well as in the European Union, and we've already been approached by a number of cancer centers in Europe, whose hospitals have already had experience using our product in critical illnesses, to also now collaborate with us on working to treat Cytokine Release Syndrome. We also have an active outreach program in Europe as well where we are approaching these clinical oncology centers, to be able to have CytoSorb in -- to have it positioned for use in these various in -- in the treatment of cytokine release syndrome. We believe that it represents a very viable alternative to steroids. So it's currently the -- the first line treatment is tocilizumab, which is an injection of an IL-6 receptor antagonist. And we believe that, that will likely to be used as first-line treatment. But in many studies, tocilizumab is not effective alone and often requires the need for steroids. And we believe that ultimately, we can be used instead of steroids, because steroids have the potential to cause damage to the CAR T-Cell immunotherapy cells, causing potential apoptosis of those cells and potentially impacting long-term complete and partial response rates. And so we believe that CytoSorb represents a superior alternative to steroids, and that's how we're currently positioning CytoSorb today in the European Union. And then the United States we'll have hopefully an update on our activities here in the U.S., but that is something that we'll talk about in the future.

(Operator Instructions) We'll go next to Sean Lee with H.C. Wainwright.

I just had a quick question on the dedicated procedure code for Switzerland. Could you highlight -- provide a little bit more color on how that's different from what's available now. And although I know you guys don't break out the per country results, how important is Switzerland for your direct sales operations? And do you expect this approval to make a material impact to your overall sales?

Yes, I think that Germany, Austria and Switzerland represent our top direct sales territories, Germany obviously, being the #1. But Austria and Switzerland also being very strong. The prior reimbursement in Switzerland was based upon a more generic code with incomplete reimbursement. And what the procedure code has a potential to allow is for now full reimbursement at CytoSorb, as well as the underlying procedure itself and the ancillary products. The family that we now have a full reimbursement in many, many hospitals throughout Germany. So Switzerland is widely regarded in Europe as having one of the best health care systems, providing citizens with top-of-the-line medical therapies. And so getting reimbursement in Switzerland is very important, not only from a revenue generation standpoint where we do believe that it can become mature over time, but also from a perception issue given the high-profile nature of Swiss medicine.

And it appears there are no further questions at this time. I'd like to turn the conference back over to management for any additional or any closing remarks.

Well, thank you very much, everyone, for your participation today. And if you do have any other questions, please feel free to reach out to Jeremy Feffer at jeremy@lifesciadvisors.com, and we'll try to reply to your questions where possible. In addition, if any of the analysts have additional questions or comments, we're available for follow up conference call. We look forward to our next quarterly call. Thank you very much, everyone, for participating. Good night.

Thank you, that concludes our conference for today.