Cytosorbents Corp (CTSO) 2019 Q2 法說會逐字稿

Good afternoon and welcome to the CytoSorbents Second Quarter 2019 Financial and Operating Results Conference Call. At this time, all participants are on a listen-only mode. Following the formal remarks, we will open the call for your questions. Please be advised that the call will be recorded at the company's request.

At this time, I'd like to turn the call over to your moderator, Jeremy Feffer. Please go ahead.

Thank you, Jen, and good afternoon. Welcome to CytoSorbents Second Quarter 2019 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, Senior Vice President of Sales and Marketing from Germany; and Christopher 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 August 6, 2019, 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 second 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 my pleasure to turn the call over to Dr. Phillip Chan. Phil?

Thank you very much, Jeremy, and good afternoon, everyone. I'm pleased to report a resumption of our historical pattern of growth with 67,000-plus CytoSorbents treatments delivered, up from 46,000 a year ago. Our trailing 12-month total revenue was $23.2 million, including product sales and grant income versus $19.2 million a year ago. Our second quarter 2019 product sales were $5.9 million compared to $5.3 million a year ago. Our results achieved the highest quarterly product sales in our history, driven by record direct sales and a rebound in distributor sales. Had the average euro to dollar exchange rate remained unchanged, second quarter 2019 product sales would have exceeded $6 million. In fact, $6.2 million for the first time. We were pleased that a major distributor that did not order in the first quarter of 2019, began reordering in the second quarter of 2019. But even without these orders, product sales would still have been a quarterly record.

Fresenius Medical Care was another one of our partners that did not order in the first quarter as they exchanged several of their countries in the EU with Mexico, South Korea and the Czech Republic. And during the quarter, we worked closely with Fresenius Medical Care and submitted the CytoSorb registration for Mexico and South Korea and expect an update on progress by the end of the year, if not outright registration. Meanwhile, we have jointly initiated commercialization planning and pre-launch activities, including conference, marketing and other key opinion leader events. We had a healthy cash balance of approximately $20 million at the end of July.

Another milestone was the publishing of the U.S. REFRESH I study. This is published in seminars in thoracic and cardiovascular surgery, a journal of the prestigious American Association for Thoracic Surgery, or AATS, where our results were first presented at their conference. The paper confirmed the safety of CytoSorb in complex cardiac surgery patients and the top line results that were reported previously on the statistically significant reduction of activated complement in all patients and plasma-free hemoglobin in patients undergoing valve replacement surgery on cardiopulmonary bypass for greater than 3 hours.

There was an associated editorial commentary by surgeons at the University of Washington in St. Louis not associated with the study. And in that editorial commentary, they had the following quote. They said the Achilles' heel of complex cardiac surgery has long been the deleterious effects of prolonged cardiopulmonary bypass, characterized by the cascade of hemolysis, release of plasma-free hemoglobin, activation of inflammatory mediators and end organ dysfunction. The holy grail of research in this subject would be to find something able to mitigate or eliminate the mediators responsible for these potentially catastrophic downstream effects of prolonged cardiopulmonary bypass.

Gleason, et al., have eloquently explored the use of hemoadsorption technologies specifically designed to reduce plasma-free hemoglobin during prolonged cardiopulmonary bypass in a multicenter randomized controlled trial. REFRESH I led to the development of the U.S. REFRESH 2-AKI pivotal trial. Again, this is a 400-patient randomized controlled trial that is a pre-market approval trial amongst many centers, targeting the reduction of postoperative acute kidney injury using CytoSorb during complex cardiac surgery. Currently, there are now 109 patients enrolled, roughly 27% of the targeted 400 patients at 24 active trial sites, and we are currently actively adding new sites and increasing the awareness of the study to accelerate enrollment.

As the time line below shows, we're targeting enrollment of 200 patients by the first quarter of 2020, followed by an interim analysis, and then completion of enrollment targeted by the end of 2020, provided that we are able to increase enrollment to roughly 20 patients per month, which should be feasible. With the completion of the study, we will have multiple activities going on in parallel and plan to complete data analysis and PMA or pre-market approval submission that is intended to lead to U.S. approval by middle of 2021.

Moving on to the REMOVE endocarditis trial. This, again, is a 250-patient randomized controlled trial funded by the German government that is evaluating the safety and efficacy of CytoSorb to improve organ dysfunction when used intraoperatively during valve replacement surgery for infective endocarditis. The trial is nearly 90% complete, with 222 patients of a targeted 250 patients enrolled at 15 active centers. Enrollment is expected to complete before the end of this year and as -- but as a government-sponsored multi-centered study, we cannot influence the time line but believe that top line data by mid-2020, I apologize, mid-2020 is feasible.

And in terms of HemoDefend, this is a point-of-care filter that rapidly and efficiently removes noninfectious contaminants from transfused packed red blood cells that can cause transfusion reactions. This is a program that is funded up to $4.7 million, by National Heart, Lung and Blood Institute, a division of NIH, as well as U.S. SOCOM or Special Operations Command. This technology is technically compatible with pathogen reduction technologies that are being offered by a number of other companies in this space. We are targeting a total addressable market of 100 million packed red blood cell transfusions administered annually worldwide. However, initially, we intend the device for patients receiving multiple units of blood, where the risk of transfusion reactions is very high, including in diseases such as trauma, gastrointestinal bleeding, high-risk surgery, cancer and other blood disorders.

The pivotal trial design is a post-transfusion recovery and survival assay for autologous blood. The goal is to have the FDA IDE submission this year following requisite bench testing for efficacy. Meanwhile, our CRO and clinical trial sites have been selected. Following IDE approval, the clinical trial is expected to be completed within 3 to 6 months.

With that, let me turn it over to Kathy to give financial highlights for the quarter. Kathy?

Thank you, Phil, and good afternoon, everyone. For today's call, I'll provide an update regarding Cytosorbents' second quarter 2019 financial results, including product sales progress. And in addition, I'll provide an update around our working capital and cash runway.

CytoSorb product sales for the second quarter of 2019 were a record $5.9 million, which represents our best quarterly product sales ever. This is an 11.5% increase over product sales of approximately $5.2 million for the second quarter of 2018. And this brings the company's annual product sales run rate to approximately $23.4 million. This increase was driven by an increase in direct sales from both new customers and repeat orders from existing customers as well as an increase in distributor sales. The euro to dollar exchange rate declined from an average rate of $1.19 in the second quarter of 2018 to an average rate of $1.12 in the second quarter of 2019. If the euro had remained unchanged from Q2 2018, then Q2 2019 product sales would have been approximately $357,000 higher than product sales actually reported, or our product sales would have been approximately $6.2 million, an increase of 18% over second quarter 2018 product sales.

Our total revenues, which includes product sales and grant revenue, were approximately $6.2 million for the second quarter of 2019 as compared to approximately $5.8 million for the second quarter of 2018, which is an increase of approximately 8%. And our second quarter 2019 gross profit grew to approximately $4.4 million, which is an increase of 11% or $428,000 over gross products of approximately $4 million for the second quarter of 2018. Now our gross profit margins on product sales were approximately 76% for Q2 of 2019. That's up from 74% for the prior year, and that is primarily as a result of the achievement of manufacturing efficiencies, and we believe we are closing in on our target of 80% blended gross margins on a quarterly basis by the end of 2019.

Turning to our 6 months financial results. Our product sales for the first half of 2019 were approximately $10.4 million, which is an 8% increase over product sales of $9.7 million for the first half of 2018. And once again, the euro to dollar exchange rate declined. In fact, if the euro had remained unchanged from 2018, our 6 months 2019 product sales would have been approximately $737,000 higher than we actually reported or approximately $11.2 million, which would have been an increase of 15% over the prior year's product sales. Grant revenue was basically unchanged at $1 million for the first half of 2019 as compared to the first half of 2018. And our total revenues, which include product sales and grant revenue, were approximately $11.4 million for the first half of 2019 as compared to $10.7 million for the same period in 2018, an increase of approximately 7%.

So next, we'll look at our quarter-over-quarter product sales. And we note that we continue our trend of 27 consecutive quarters of year-over-year product sales growth. Q2 2019 sales of $5.9 million represent a record for quarterly sales, and we believe it puts us back on our historical path of growth. Management remains optimistic about continued year-over-year sales growth for the remainder of this year and into the future.

And next, we'll look at our trailing 12 months product sales. And as you can see from this chart, overall, our annual product sales growth continues to exhibit a very strong growth trajectory. And despite quarter-to-quarter variability, we expect continuation of this overall positive trend in the future. This, as a result of our progress with regard to, first, expanding our sales team resources; second, organic growth in existing markets; third, increased international expansion; fourth, publication of new clinical data in a wide variety of clinical applications; and finally, increased partner support.

I want to talk about the new loan amendment with Bridge Bank. On July 31, 2019, we executed an amendment to our loan agreement with Bridge Bank. And upon execution of this amendment, we drew down an additional $5 million in debt, bringing our total debt from Bridge Bank to $15 million. Importantly, this provides non-dilutive working capital, strengthening our cash position and allowing us to continue to aggressively pursue our clinical trial objectives and to rapidly grow worldwide product sales. I view this amendment as providing actually $9 million in near-term capital. There is the $5 million in cash from the term loan but then in addition, we were able to extend the interest-only period on our entire debt facility another 6 months and potentially 12 months, provided that certain conditions are met. And this will postpone principal payments until November 2020, freeing up another $4 million in short-term working capital.

So with that, let's take a look at our working capital position. As of June 30, 2019, we had approximately $16.3 million in cash, which, with the additional $5 million in funds from the Bridge Bank term loan, puts our cash in hand at approximately $20 million, which we believe provides a solid operating foundation for the company. We believe the existing cash runway will allow us to meet our operating needs well into 2020.

Now in the second quarter of 2019, we also established an at-the-market facility of up to $25 million with co-agents, Jefferies and B. Riley FBR. This ATM provides an efficient and cost-effective way for us to raise funds for the company if they are needed. And as you are aware, in the past, we have been very careful with regard to our use of the ATM. We're always trying to strike a balance between having a strong balance sheet, which provides adequate capital to meet our operating and clinical trial objectives and also avoiding shareholder dilution.

Now turning to our capital structure. As of June 30, 2019, we have approximately 36 million common shares outstanding on a fully diluted basis.

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

Thank you very much, Kathy. In terms of guidance, CytoSorbents has not historically given specific financial guidance on quarterly results until the quarter has been completed. However, we expect that the third quarter 2019 product sales will exceed third quarter 2018 product sales, and we also expect that the second half of 2019 product sales will exceed the first half of 2019 product sales. Lastly, we also reiterate our guidance that we expect to achieve blended product gross margins of 80% on a quarterly basis this year.

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

(Operator Instructions) Our first question comes from the line of Josh Jennings with Cowen and Company.

Congrats on the record product sales quarter. I was hoping to just start with -- just to -- I know you gave some details on distributor sales picking back up after some of the short-term disruption experienced in the first quarter. But can you talk about whether those -- just to be clear, whether those issues are fully resolved? And then how do you see the pace of distributor sales picking up over the back half of 2019 and 2020? I realize there's some countries that are going to get -- you're going to get CytoSorb registered in Mexico and South Korea through Fresenius, but any other tailwinds that are in play for the distributor sales channel?

Thanks, Josh. In terms of the distributor sales, so the issue that we faced in the first quarter was that 3 distributors, one of which was Fresenius Medical Care, did not order related to inventory issues and other things. What we said in the first quarter is that we expect that those issues would resolve amongst all 3 distributors by the end of the year. And again, in the second quarter, one of those distributors began reordering again, and that was very good news.

In terms of Fresenius as we talked about, they still continue to have inventory in Europe that they're working down. They're doing a very nice job on that and I might ask Chris to comment on some of their progress there. But they will not order or cannot order for Mexico and South Korea until they receive registration. But we expect, again, to hear more about registration, if not get that registration outright before the end of the year. At which point, we expect that Fresenius would be ordering again.

And then the third distributor, we believe and have fairly good visibility that they will be also ordering before the end of the year. But again, without those 3 distributors, we were still able to achieve record performance this quarter. And certainly, the resumption of ordering from one of those 3 certainly was helpful.

Excellent. And you're still continuing to see strong growth out of Germany, and I was just wondering, it's probably hard to track each CytoSorb procedure with -- or case where CytoSorb is implemented in the therapy, but is there any kind of trend in terms of where you're seeing the growth in Germany in terms of indication, cardiac surgery versus sepsis versus some other indication? Or is it more broad-based across all indications, knowing that there are numerous indications for CytoSorb?

I think it's fairly broad-based. I would say that based upon our numbers, roughly 1/3 of our uses are in cardiac surgery and roughly 2/3 are in the intensive care unit, either postoperative to cardiac surgery or for critical illnesses like sepsis, trauma, burn injury and other things. But let me turn it over to Christian for more commentary. Christian?

Yes, hello. Good evening from me here. Yes, Phil stated already there's progress in the major application fields. The 3 major application fields we are serving at the moment is cardiac surgery, as the, in my opinion, fastest-growing field and we have intense (inaudible), which includes especially also the sepsis patients and the new in future big part of our application goes into liver support therapy. We have spoken about this over the last earnings call as well.

For in cardiac surgery, (inaudible) chance to become a standard therapy in the near or midterm future. There is (inaudible) currently (inaudible) are being conducted there. The REFRESH II trial in the U.S. is the (inaudible). And about this trial, sponsored by the German government, the REMOVE trial. And then we have multiple IITs running in Europe, will be finished and published over the next few quarters.

So also on this field, I think the number of supporting QLs and sites have constantly growing and one special fact in Germany plays into this. The Helios group, which is owned by Fresenius, has started to pick up after we have worked with them like for 4 years without any results. Now they -- especially in cardiac surgery, they are topping and we have increased our footprint there over the last 2 quarters. And then in cardiac surgery, we also could show cost benefit in the first communications, and this will be published, and then, of course, marketed over the next quarters. Is this first good overview for you, Josh?

That's great. Thanks for that answer, I appreciate it.

Christian, sorry, your phone was breaking up quite a bit and so -- but I think we got the general gist of what was said. If there's any need for clarification, I can certainly do so.

Okay, great. I think my last question is just congratulations on adding new sites for REFRESH 2-AKI and congrats on the publication for the U.S. REFRESH I as well. I was hoping that -- this may seem a little bit rudimentary and you did some of this on the -- in your prepared remarks. Maybe just kind of outline for us on REFRESH 2-AKI, just the path forward here. Do you expect enrollment pace to pick up? Are you going to have more sites? And just maybe remind us how many sites you plan on activating in total. And then any updates on or thoughts on the interim analysis when you hit 200 patients, the halfway point.

Sure. Well, Eric, why don't you try to provide some color on that?

Okay. Sure, Phil. Let me unpack a couple of those questions. You asked about the current committed to the study, you also want to have a sense of what we're planning in doing in terms of increasing the number of sites. And then finally, with regard to the interim analysis. So on the first point, we're actually satisfied that we have at least been able to maintain a very strong enrollment to date, but we're obviously not satisfied. Our objective is that beyond just trying to meet the objectives for this year to make sure that we have full enrollment in 2020. And so we currently have 24 active sites, our expectation is to bring on at least an additional 5 sites this fall. And the summertime is always a little bit slow in terms of finalizing contracts because of staff at hospitals often being on holiday, but we expect to be able to increase the rate of recruitment with the addition of additional sites in the fall.

The final number of sites to be had is really being determined based upon our desired rate of recruitment. Our goal is to try to maintain maximum study quality by being able to make sure that we're really monitoring very aggressively. These types of studies in AKI really require that you stay on top of the sites because the endpoints that are required, measurement of the urinalysis, measurement of creatinine, follow-up on adverse events, really is best done by having your own staff really follow progressively with study coordinators. So we don't intend to add on additional study sites beyond what's required to meet our objectives, but I'm not going to give you a final number of 30 versus 35 until I actually have seen what the output is from our additional centers.

With regard to your question about the interim analysis, we expect that to be on target in terms of timing. I will not be able to tell you the results of that -- because of the need to maintain study integrity. We do have a detailed study analysis plan that's been filed with FDA with the objective of being able to look both the overwhelming efficacy, futility as well as the potential need for adjustment in patient numbers based upon the outcomes we've seen. But we will not be reporting out any odd ratios with regard to AKI rate for the obvious reasons of making sure that we retain the integrity of that trial. Did I answer your questions?

You did, absolutely. I appreciate it.

Our next question comes from the line of Andrew D'Silva with B. Riley.

Sorry, if you highlighted any of this, but I was moving between calls. But as far as the Fresenius inventory work-through goes and then the other 2 distributors, I know you've kind of highlighted a little bit about that in your prepared remarks and in the previous answer, but should we anticipate any of those outside of the one they already ordered to come in as revenue during Q3? Or would you expect that to be more of a Q4 event?

I think that we expect that both will be coming in, in Q4 and whether or not they'll be able to come in, in Q3, I guess, remains a question. But suffice it to say, the first distributor has worked through their inventory and is back to a traditional ordering pattern.

Okay, great. And then due to the just general EU exposure that you have, any sense how this quarter might turn out as far as Q3? Obviously, summer months in Europe kind of swing a lot depending on just how often people are out of the office and stuff like that. Is there any sort of normalized trend that you're seeing? Or should we expect sales just in general to be more weighted towards Q4?

So last year was really the first year we saw seasonality in the third quarter. And as you say, given that the vast majority of our revenue are coming from the European Union and July and August or particular -- are particularly busy months for holidays, things slow down quite a bit. So elective surgery slows down, a lot of hospital shutdown operating suites, and last year was particularly a slow year for infections and sepsis. That being said, this year, I think it's still a little too -- it's still too early to say, given that we're just at the beginning of August. But to date, we've been tracking better than we have last year, and we hope that -- and again, we've given guidance that we believe that Q3 this year will be better than Q3 last year.

Okay. Good color. And I just was skimming through your Q and noticed just rest of world direct sales went up about 14%, 15% year-over-year, which was slower than the growth seen out of Germany. I'm sorry, they were about in line with what was seen out of Germany. And I was just curious, because you added so many new regions during the quarter, if there was any sort of movement towards the third quarter when you start recognizing revenue in the new regions? Or did it actually start in the second quarter?

So I -- as we mentioned before, a lot of the new territories that we added, so the 5 additional territories, which include Poland, which began sales in April of 2019, and then the Scandinavian countries of Denmark, Norway, Sweden and -- well, they basically started at the beginning of January. So it takes time for them to get up and running. And again, Poland is one of the biggest countries of the 5 and we -- they have been making some really great progress in terms of establishing their infrastructure and establishing market awareness of the technology and working on key opinion leaders. And we expect that, that -- all those accounts actually will begin to accelerate in terms of sales less likely for Q3, more likely for Q4.

Our next question comes from the line of Jason McCarthy with Maxim Group.

So as we're approaching an IDE for HemoDefend, I'd like to see if you could give us -- give the -- like the path to approval. Because if I heard correctly, that trial is expected to take like, you said, 3 to 6 months. So does that mean that HemoDefend could make it to the U.S. market before CytoSorb? And then how much are you expecting that trial to run? Would it be substantially covered by the $4.7 million from the U.S. government?

Yes, so exactly. So HemoDefend, there's quite a bit of work that is done to try to drive approval. One of those -- so it really is in 2 parts. One is bench studies, which are designed to establish the efficacy of the filter in terms of being able to remove the substances that we are looking to remove. And then there is a human post transfusion recovery and survival assay, where we have healthy volunteers who basically donate their blood. We age that blood or the sites will age that blood and then that blood gets filtered through our HemoDefend filter. Radio-labeled packed red blood cells get filtered through our filter and they get transfused back into the same patient. And basically, they look for 24 hours later at the recovery of that radio activity and expect to see roughly 75% recovery.

And so that is meant to measure the survivability of those red blood cells once they are transfused back into the bloodstream and make sure that our HemoDefend filter is not doing anything untoward to that blood to cause it to have a decreased longevity. This is a very standard assay in the blood transfusion industry, very well accepted endpoints across the board. So that is a very short study, as you can imagine. We're talking less than 25 patients.

And yes, so that part of the study is expected to happen very quickly. Following IDE approval, there's clearly some activities that have to happen, including making sure that we have the agreement in place with the sites and the budget in place with the sites, ethics committee approval with the sites. But once we get those done, the trial itself is actually very quick. And we plan to get the requisite bench testing looking at efficacy done prior to filing our IDE submission. So that is expected to be done this year. So yes, to your question, HemoDefend is, should everything go well, is expected to be on the markets here in the United States prior to CytoSorb.

All right. And then just the second part on the cost of the trial, if you think that $4.7 million is going to cover a good bit of -- like a big chunk of the total cost.

Yes. So we have a grant from National Heart, Lung and Blood Institute that is a Phase IIb bridge. And that is a one-to-one matching grant, up -- and so NHLBI will provide up to $3 million in funding towards the development as well as clinical studies leading to potential U.S. approval for all activities. Our goal is to match that obviously, again, one to one. So at the very least, it's a 50% discount and off the trial. And from a total cost perspective, we believe that it will not exceed the amount of money, a total of $6 million that are provided under this grant. So that's $3 million from NHLBI and $3 million in matching funds from CytoSorbents.

Our next question comes from the line of Jason Kolbert with Dawson James.

Can you just -- congratulations, fantastic quarter. Can you just go through the time lines with me on the U.S. trial, again, in detail?

Yes. So -- and I think that basically HemoDefend, I'm not -- I assume you're talking about the REFRESH 2-AKI trial, not HemoDefend.

I was, but you could touch on both, that would be helpful.

Okay. So in terms of the -- I apologize, Jason, your line was breaking up a little bit, but I think you said REFRESH II, is that right?

Yes, but I'd be interested in HemoDefend as well.

Okay. Yes. So I think that based upon the current pace of enrollment that we're on right now, we expect to achieve 200 patients enrolled by the end of the first quarter. At which point, we would be doing an interim analysis. Now as Eric mentioned previously, his team is working very hard to accelerate the rate of enrollment by increasing the number of active trial sites and making sure that we're actively involved and visiting sites and doing all the kinds of things that we need to do to be able to accelerate enrollment. Our goal is to get somewhere on the order of 1 patient per site per month, which we believe is very doable. But obviously, when you're dealing with many sites, it becomes very challenging.

That being said, provided that we can get to that 20 patients per month per site, we believe that we should be able to complete enrollment by the end of 2020. At which point then, we would go into data monitoring and review and database lock. And that would be followed by data analysis and statistical analysis and then PMA submission. And our goal is to try to get to that point by mid-2021, where we're in a good position to, sometime probably mid-year to the third quarter, submit the PMA filing for our PMA filing.

That's very helpful. Yes, that's very helpful. And I know Michael Okunewitch was focusing in on HemoDefend, if you could just touch on those time lines for me as well.

Yes. So HemoDefend, I think our goal is to file that IDE submission by the end of this year. And maybe, actually, let me give an opportunity to Vince Capponi to comment. Vince, would you like to comment on the time line?

Sure. Thanks, Phil. So basically, we've -- continuing to make progress on the HemoDefend program. We're at the stage now where we're actually beginning to fill devices specifically for what Phil alluded to earlier, which was the bench testing, which is the next step that we need to complete in order to do the IDE submission. We plan to do the IDE submission by fourth quarter, sometime in fourth quarter, with the expectation of being in the clinic the first quarter of 2020. As Phil mentioned, it's going to be about a 6 months trial. So by mid-2020, we expect to have completed that trial. It's a very small number of patients, that's one of the advantage of these types of products with respect to blood filtration used in the clinic for like packed red blood cells, et cetera, it's a very fast trial. And so we expect that we should be able to complete that by mid-2020. And so to the earlier question, we think there is a chance that we could have this in the FDA for approval and possibly approved by the end of 2020.

Our next question comes from the line of Brian Marckx of Zacks Investment Research.

Congrats on the quarter. In terms of the regulatory process and time line for Mexico and South Korea, can you -- do you have a sense of how long or how long that may take and when you may have regulatory approval?

Yes. Vince has been leading that effort. Vince, would you care to comment?

Sure. So we've made all the submissions both for Korea and Mexico. We hope to hear something by the end of this year. It's somewhat out of our control, so you never know with these various regulatory bodies exactly what their schedule and time line is going to be. So we are hoping that we'll hear, at least based on our discussions with FMC in Korea and Mexico, that there's a chance that we could hear by the end of the year or by the end of this year, and then probably more than likely by first quarter of next year. But I think there's a chance we could get approval this year, but it would more than likely be into the beginning of next year.

Okay. And how significant do you think those 2 territories are in terms of revenue? And then is there a reimbursement component after regulatory approval?

So I'll maybe turn that over to Chris, who has been working very closely with FMC as well. Chris?

Sure thing. Brian, thanks for the question. We've been working with the senior sales leadership in both countries, have a lot of support at the highest levels. That's important because when you have that, they tend to prioritize your product. So we see a good responsiveness happening from that team. Both of these markets are big. I don't have the exact population in front of me, but they're quite large. I think we have them in the original press release that we put out, and there's a significant unmet need in both of these markets.

The biggest difference between the 2 is that Mexico has more of a self-pay component. So it will look a little -- it will set up a little bit more like our business in India, where we're, in some cases, there will be a self-pay component to it. But in both cases, we'll look to go through and a, take advantage of existing reimbursement codes that are there today that we can use. And then longer term, look to establish a dedicated code like we have in Germany and then in the interim, as you know, we've been putting a lot of investment into our health economics team to give tools to our direct salespeople and distributors to make the economic case. So that will be something that we actively work with both of these organization -- both of these countries.

I should also say that, just to piggyback onto what Vince was saying, we are preparing some pre-marketing activities in both countries. We're optimistic that something will come through around the end of the year or early next year. So we're starting to tee up some KOLs and get out to some major conferences to get that market launch started as soon as we can. So I think both will be good markets for us.

Okay, great. And one on cardiac surgery, REFRESH II. Phil, you talked about a potential time line for the PMA. I assume it's just the REFRESH 2-AKI study and maybe the REFRESH I that will support that filing. Is there anything in addition, clinical data-wise that you think that FDA is going to want to see?

Vince or Eric, would you like to take that?

I guess I just would comment that obviously, the FDA is always interested our safety data, and I can say that Vince and I are working very hard to make sure that we leverage the extensive experience that has been developed in Europe. I think that's going to, hopefully, be a very strong point, given the number of utilization, the number of times it's been used in cardiac surgery. We are hopeful that, that would be supportive. But obviously, that's a review issue. Vince?

Yes, just to piggyback on what Eric's saying. I mean, this is a pivotal trial. So in theory, we should have all the information we need to make a registration of the device for commercialization. So basically, there should be adequate information to bring this device forward. And I don't believe anything else will be required, but again, to Eric's point, you never know. But again, it's been powered to show the endpoint, and providing that we're successful there as we think we will be, then I don't expect that there should be any additional information request.

Our next question comes from the line of Sean Lee with H.C. Wainwright.

Just a quick update on the REMOVE study. I know that's being run by the German government but with the enrollment in 90%, so we can probably expect to see data as early as the end of this year or early next year. I was just wondering, is endocarditis a major indication for you guys right now in Germany? And if the results, obviously, is positive, what kind of impact would you expect to see on your commercial efforts there?

Yes. So what's quite interesting is the pace of enrollment that they have been able to enroll that trial. So they began in January 2018 with only a handful of sites. And now at 15 sites, they're enrolling that trial actually very rapidly. And what I think it speaks to is the growing population of people at risk for endocarditis, both from the traditional path of mouth flora seeding the bloodstream from dental procedures in elderly people, but also from the growing problem of the opiate crisis and the use of dirty needles for IV drug abuse. And certainly in the United States, it's a massive problem and we have a lot of interest to bring CytoSorb here to the United States for that particular application.

But I think that endocarditis, although historically has not been a big application like valve replacement, right? Valve replacement is tenfold a greater-sized market than endocarditis. On the other hand, endocarditis is one of those applications where the patients are so sick oftentimes, particularly from IV drug abuse where the offending agent -- defending organism is often staphylococcus aureus, which is skin bacteria, but a very dangerous bacteria. You've heard of staphylococcus aureus from MRSA, Methicillin-resistant staph aureus. And the adverse events rate, the complications, the hemodynamic instability, the rates of sepsis and postoperative infection and other complications are mind-boggling. And the value of CytoSorb has been seen in many, many centers around Europe because it helps to stabilize those patients intraoperatively as well as postoperatively. And as Christian mentioned before, we believe that it is one of those indications where should we have success in a number of these studies, we could potentially become standard of care in that application.

Great. My last question is on the direct sales operations. Are there plans to expand that in the second half of this year?

So we -- so that's a kind of multifaceted question. So there's direct sales in our direct territories that we currently are in. And yes, we have had an ongoing program of expanding the sales teams and sales support teams in those countries, particularly in Germany, but also in other countries where we have considerable momentum. But there are still a lot of countries that we have not -- that are not claimed by distributors or partners. In certain of those countries, we would look to potentially go direct as the economics of going direct are often highly favorable in terms of product gross margins, but also the fact that we are typically -- our company and our salespeople are typically the most efficient sellers of our product, given that we are so closely tied to the product, and that's all we sell. So yes, so both expansion internally within our current direct territories as well as an expansion of additional territories are in the plan.

Ladies and gentlemen, at this time, I'd like to (inaudible).

Okay. Well, thank you, 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 will reply to your questions where possible. Thank you very much, everyone, and have a good night.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.