Geron Corp (GERN) 2006 Q3 法說會逐字稿

Thank you for your patience, ladies and gentlemen, and welcome to the third quarter 2006 Geron earnings conference call. My name is Candace, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's conference, Executive Vice President and Chief Financial Officer, Mr. David Greenwood. Please proceed, sir.

Thank you. Good morning, and welcome to the Geron earnings call. I am David Greenwood. With me is Tom Okarma, President and CEO. This is an earnings-related call and we will begin with a review of the numbers. Our agenda then includes an overview of recent operating highlights at the Company, and a brief summary of our operating plans for the remainder of 2006 and early 2007. Following that presentation by Tom, we will have a question-and-answer session.

First, 2 informational items. In the event any forward-looking statements are made during this call, please understand those comments are made subject to the Safe Harbor provisions of the Securities Reform Act of '95. Any forward-looking statement involves uncertainty, and we refer you to the risk factors detailed in filings with the SEC. Secondly, as the operator indicated, we are in a listen-only mode. The lines will open for the Q&A, and this call will be available for webcast replay until November 30. Please go to our website, www.geron.com for information.

To our financial results. As you see on the condensed P&L attached to this morning's announcement, revenues for the third quarter were up 7% over the comparable 2005 period. Year-to-date revenues are lower insofar as 2005 included a substantial upfront payment related to the formation of a joint venture. Other cash inflows to the Company during the quarter included $2.3 million of interest income, and we ended the quarter with $175 million cash on the balance sheet. R&D expenses declined in the quarter on a comparative basis, comparative basis, but that is coincidental, depending on the timing of drug purchases and other supply contracts. 9-month R&D expenses are up 15% year-over-year, which does reflect the cost of clinical trials. The G&A expense line item increased quarter-over-quarter because we are expensing stock options in 2006. This is, of course, a non-cash charge. Finally, I estimate our net cash burn for the year at about $31 million, a number which will increase in 2007 as we fund additional trials. At this point, I will turn it over to Tom Okarma.

Thanks, David, and good morning, everyone. Thank you for dialing in this morning. In my comments I'll pretty much follow the order of events that are in today's press release, in terms of third quarter highlights. So first starting back on the 5th of July, when we press released a summary of about a dozen presentations that our people and our collaborators made in Toronto at the ISSCR annual meeting, which is really the year's main event for stem cell research. First turning to our lead stem cell program, the OPC1, or glial cell for spinal cord injury, we presented some important results that define a second mechanism of action of these cells. You will recall that we have demonstrated exuberant myelination by these human cells when they're injected into an animal model of spinal cord injury, which is the reason for the animal's persistent and dramatic regain of locomotor function. But in addition to that remyelination, we have documented that these cells appropriately seek secrete both in vitro and in the animal's spinal cord injured tissues, neurotrophins. These are biologicals which impact axonal sprouting and survival.

So in vitro, we have identified a number of neurotrophin factors that these cells secrete, including TGF-beta 2, although there are others. And in vivo, we have over 2.5 times more neuron survival and sprouting in the tissue that receives OPCs compared to controls. So this is really important, and the significance of it is that these neurotrophins, which clearly have activity in vivo, will significantly enhance the development of alternative new circuitry in the lesion in addition to the myelination effect which would restore axonal tracks that are in fact intact. So in sum, these cells actually provide to the injured spinal cord, literally all of the appropriate stimuli that are required for repair. That's a really important finding.

A second paper describes the scalable production of these same cells, OPC1, from our master cell bank. So this paper demonstrated a production process that's completely consistent with current good manufacturing processes, which is made from our pathogen-free H1 ES master cell bank. If you recall, our master cell bank is made from a cell line that is fully qualified for human use, and the cell bank is maintained without feeders, without any serum, and contains only human or highly purified recombinant reagents, namely a completely chemically defined media. We demonstrated over 9 month cell survival in the animals with spinal cord injuries. That number is now out to 12 months, which is an important point to document the permanent nature of the survival kinetics of these cells after they are injected into the spinal cord injury. The last point in this presentation is that the scalability of the process is quite good. Today we can make over 2,500 full doses of OPC1s per run, and that scale is easily increased.

Thirdly, on the OPC1s, and this is an issue that, of course, crosses all of our ES-derived cell types, has to do with the potential for immune recognition of the cells after they are placed into human subjects. In '04, in stem cells, we published that the undifferentiated embryonic stem cells are immune privileged. Namely, they are not detected by human T cells, B cells, or serum. This presentation extended those results and showed that the OPC1 product, the very cell we plan to inject into patients, is also immune-privileged, and shares exactly the same characteristics as the undifferentiated line from which it's produced. So the OPC1 does express low levels of class 1 antigens, but no class 2, just like the undifferentiated ESCs. Functionally, there is no reactivity of the OPC1 in a standard mixed lymphocyte reaction from multiple disparate donors. There is neither any activity against human NK cells, and sera from over a dozen different individuals had little or no [lysis] effect in vitro on the OPC1s, and that addresses the misinformation that was published a year ago about these cells potentially being contaminated with murine sialic acid residues. We find no evidence of that on our lines, directly or indirectly. And all of these immune-privileged data were repeated with multiple [GNP] production runs of OPC1. So we are highly confident now that the low-dose cyclosporin transient immune suppression will completely prevent immune recognition of these cells in vivo until the actual lesion heals over the course of a few weeks post-op, at which time once again, the cells will be in the immune-protected central nervous system.

Turning to the Islets for diabetes, this poster really documented that we have the cell. These islet-like clusters produce insulin which is responsive to glucose concentrations, as well as glucagon and somatostatin, the 3 main islet hormones. They also express the right transcription factors, giving us a pretty elegant molecular fingerprint that these are the right cells. These cells are now highly enriched, both by sieving and by a more precise production method, and are now in Canada at our Edmonton collaborators in the animal models of hyperglycemia. So stay tuned for more news about the in vivo activity of these cells later in the year.

Turning to cardiomyocytes, we have now moved that cell type into the second position for entry into the clinic behind the glial cell. We have demonstrated now scalable methods to produce cardiomyocytes in a very similar serum-free and defined growth factor containing medium as OPC1. There are, again no, co-culture steps, and we achieve now 80% purity of cardiomyocytes without any further purification steps. We have demonstrate that these cardiomyocytes can be frozen and thawed, and they retain the same electrophysiology, drug responses, and in vivo survival activities as cells injected into animals without prior freezing. These cells have now been adapted to our MCB production methodology, and cells made that way when transplanted into the infarct zone of infarcted rats in graft, survived and clearly prevent heart failure. Later this year we expect, or early next year, a publication documenting these effects using echoes, as well as MRI. It's really a seminal paper, and I think will show proof of concept for the cardiomyocyte prep that is as elegant and compelling as last year's publication of the glial cells in the spinal cord injured rat model.

We had a few other publications from the Geron Bio-Med operation in Edinburgh that focused on liver cells, further characterizing their molecular markers and their function, in the first demonstration that osteoprogenitor cells, cells that form bone in vivo, are capable of repairing a full-thickness critical-size skull lesion in animals with much greater degree of closure than derived from [inaudible] stem cells as a comparator. So these papers really emanate and sort of document the multiple shots on goal that we're creating in the embryonic stem cell side of our business, which are protected by 63 issued or allowed embryonic stem cell patents, and over 221 patent filings worldwide.

Turning to GRN163L, our telomerase inhibitor drug, in July we published in the Tetrahedron Letters a new patented method for synthesizing the monomers that are used to build the 13 [meraligo] which is GRN163L. This is new chemistry invented at Geron, and is significant both because it decreases significantly the cost of generating the monomers, and it also reduces the chemical complexity of the synthesis of the monomers, yielding both higher quality monomers, which in turn produces a less expensive drug with greater purity. As in any drug development program as we progress from Phase I to Phase II studies, the Agency appropriately wants evidence that we are increasing the purity of the compound in question. And this chemistry goes a long way to doing that, as well as reducing the cost of the compound.

An important paper was published in July in the Journal of Regenerative Medicine by our collaborator, Hans Keirstead, at UC Irvine, which speaks to the safety of the OPC1 cells. In this study, Hans gave a mild contusion injury to the rats, which, over 3 to 4 weeks, spontaneously heals, and the animals fully recover. What he then did was inject the full dose of OPC1 cells into that mild contusion, and demonstrated no impact on allowing those animals to recover normally. That says to us that even in a mild contusion state, these cells have no negative impact on the normal healing process. And that's a really important study that the FDA had actually asked to us do. We have also, in that study, repeated the survival full distribution throughout the lesion, and exuberant myelination that we have published on before. And as I mentioned earlier now, our IND-enabling studies are out to 12 months, with full survival engraftment and continued myelination.

Turning to our TAT0002 drug, our small molecule telomerase activator, in August Cal Harley presented new data on the mechanism of action of this compound. You will recall that through an analysis of traditional Chinese medicine extracts done in Hong Kong, we identified a true small molecule that is a specific and potent up-regulator of telomerase in telomerase competent cells. And we have published a number of studies years ago demonstrating the potential breadth of utility in particular chronic diseases in which cellular senescence plays a major role for the concept of telomerase up-regulation. This compound in this presentation was shown to stimulate a wide variety of cytokines from HIV subject CD8 cells, which are critical to enhancing those cells' anti-HIV effects. Though this includes RANTES, MIP1-alpha, and MIP1-beta.

The observation now is that this drug in vitro will reawaken, or through telomerase activation mechanisms, the declining function of the patient's CD8 lymphocytes, which during the period of infectivity but asymptomatic status, are responsible for containing the virus, in terms of the number of cells that are infected and in terms of viral load. Because the virus replicates indefinitely, the telomerase up-regulation mechanisms in the immune response are overwhelmed, and there's progressive clonal senescence of these specific anti-HIV CD8 clones. As those cell lines decline in function and number, you see viral load increase and patients progress with the polyclonal immune dysfunction that we recognize as full-blown AIDS, the disease. So we demonstrate that incubating those cells with our TAT0002 drug, we up-regulate telomerase and actually regain the ability of those cells to suppress HIV. We have also in this study, demonstrated that that mechanism is clearly secondary to telomerase activation because all of those anti-viral activities induced by the drug can be blocked if we preincubate with GRN163L, our telomerase inhibitor. So this compound is going beautifully, in terms of pre-IND studies and scale-up manufacturing. We have preliminary animal PK and bioavailability, and we know that this drug is orally active, and that therapeutic doses can be easily achieved through oral administration.

Turning to the patent world, in September we had -- we announced dismissal of appeals of 2 patent interference decisions that were relating to our nuclear transfer technology. You will recall that the Board of Patent Appeals and Interferences had previously ruled in favor of Geron on all counts of 2 separate patent interference proceedings dealing with our nuclear transfer estate. University of Massachusetts and Advanced Cell Technology had appealed those decisions, and have now dismissed them completely. These patents relate to our animal cloning technology that we acquired from the Roslin Institute in1999, the so-called Dolly the Sheep estate. In 2005, Geron and Exeter Life Sciences established a joint venture company called Start Licensing, Inc. to manage and license IP rights for animal cloning. And as you recall, just recently the FDA has indicated its plans to allow milk and meat from cloned animals into the food supply, which hopefully will create some demand from the industry for licenses to this IP estate. And again, we have retained to Geron all rights to the nuclear transfer technology for human cells.

In August we announced a major collaboration with the university of Edinburgh to conduct preclinical safety and efficacy studies on the three cell types that we're working on in our wholly owned subsidiary, Geron Bio-Med. And those are hepatocytes for [inaudible] drug testing and liver failure, osteoblasts, or bone forming cells, and chondrocytes, the latter 2 for musculoskeletal disorders including osteoarthritis, osteoporosis and bone fractures. This work is really an extension of the contract that we had previously held with the Roslin institute. This work will take place at the University's Centre for Regenerative Medicine , which is based at the University's Centre for Biomedical Research, which combines an 870-bed teaching hospital with the University of Edinburgh's Medical School and Research Institute which is located on a 100-acre science park development. And the Centre for Regenerative Medicine is now headed by Professor Ian Wilmut, who led the team that cloned Dolly the Sheep. So the progress on those 3 cell types in our U.K. operation, we can expect to accelerate. So that's the conclusion of my formal comments. We'll be happy now to open to Q&A.

[OPERATOR INSTRUCTIONS] Mark Monane, Needham & Co.

Actually, it's Mona [inaudible]. A couple of questions. One actually relates to some recent news that the U.S. Patent Office has agreed to reexamine the validity of 3 of the fundamental patents that were issued to WARF. And I wonder if you could maybe expand a bit more on what implications might be for Geron, and outline maybe if there's any sort of set time lines for the reexamination process? And then the second question I have actually relates to any plans that Geron might have for data presentations [inaudible] particularly [inaudible] EORTC? Thanks.

Sure. Hi, Mona. Thanks for those questions. You're correct, the Patent Office has decided to grant the request to reexamine the fundamental WARF patents that Geron, to our knowledge, has the world's only commercial license to. The impetus for the reexamination is a lot of academic frustration and some taxpayer organizations' distaste for broad enabling patents. To our view, the basis for the challenge is not material. We do expect the patents to be confirmed in their validity. And frankly, if that in fact is the outcome, the strength of that patent and our licenses would thereby be increased. These processes can take a while, and obviously they all have appeals attached to them. So I expect that this will be an issue that will carry on for well over a year before its final resolution. I would say that, you also asked what the significance is to Geron. We think generally this is a good, strong patent, and we like having an organization the size and power of WARF policing it for us. On the other hand, we have obviously surrounded each one of our therapeutic cell types with Geron's own owned patent estate, which would survive intact regardless of the outcome of the WARF validity challenge.

Your second question is upcoming presentations on 163L. We will have 2 presentations at the EORTC meetings next week in Prague, one on the pharmacokinetic data on the low-dose cohorts of 163L in both the CLL subjects and the solid tumor subjects. And a second one from Geron describing some preclinical combination synergy studies with 163L and other agents in lung cancer and ovarian cancer. The data on our drug will be early, and it will not include any pharmaco-dynamic data because of mandatory batching rules from the protocol. Those data are not yet back. We hope to have them in time for the ASH presentation, which is in December. So that second presentation on the drug, ought to have a bit more PK/PD correlation. The object of all of this data, obviously is to teach us how to use this drug in multiple clinical settings as a single agent. So the reason for studying CLL and solid tumors in separate trials is to give us a feel for how various co-morbidities affect the metabolism and PK of the drug. So some of the solid tumor patients, for example, would be carrying co-morbidity in liver function and renal function, which would not be the case for patients in CLL. And there is a precedent for there being different PK/PD relationships for a variety of targeted agents between liquid and solid tumors. So to rule that out, we're simultaneously looking at those 2 kinds of cancers.

We will be filing another protocol later in this year, and I'll announce that when we've gotten a green light from the Agency. It will be on a liquid tumor that we think actually might be a registration pathway, either as a single agent or in combination.

Great. Just 1 follow-up actually. On the ongoing GRN163 trials, can you share at all what dose level you're at?

Well, by the end of the year, although we won't be able to report it, because the data will still be pending, we will be in the lowest therapeutic cohort. So I think the take-home message is that the really full story of how high we can dose, demonstrating the safety of the compound, and hopefully impact on tumor burden and telomerase target in CLL cells will be a story for the spring.

Great. Thanks a lot.

Joel Sendek, Lazard Capital Markets.

Just following-up on that question, if I recall correctly, there are 8 dose cohorts for your studies 163. So I'm wondering how long it will take to get through all of them, and when we might have some clinical response rate data available?

Yes, it's the same answer as I just gave to Mona. I think we will have real significant data at the AACR and ASCO meetings, which would include multiple cohorts in the therapeutic dose range. You're right, there are 6 or 7 dose cohorts in each trial, starting with very low doses, and frankly, going to doses that exceed what we think we would ever need to give in order to achieve telomerase inhibition. But we obviously wanted to study a broad range of doses, again, to learn how to optimally use this compound. I should also mention that we have modified the solid tumor protocol to reduce the infusion period from 6 hours to 2 hours, with obvious impact on enrollment, and we have had no problems with any DLTs in moving from 6 hours to 2 hours. So the simple take-home is that thus far, we have seen no problem in administering this drug, even over a 2-hour infusion.

Okay. And then, question on the stem cell program. I'm wondering when the pre-clinical studies will be kind of wrapped up and you will be able to start the clinical portion.

Well, as we mentioned in the summer at the analyst day, we have had our pre-IND meeting on this topic with the Agency in May. And to our surprise, they really wanted a lot more animals followed for a lot longer than, frankly, we thought was necessary. But we're going to give them what they want, understanding that this is the world's first human clinical with cells derived from embryonic stem cells. So, for example, there will be nearly 2,500 immune-compromised spinal cord-injured rats who will receive various doses of these human cells in various portions of the IND-enabling package, studying all elements of potential toxin and tumor regenesis. We have added hundreds more animals in response to the Agency's demands, and this will incur a delay in filing from December of this year, which was our original target, to probably mid-year next year, because it will simply take 6 more months to generate these animals. But the IND package now, that the content has been completely agreed upon, we really dramatically lowered our risk of a failed IND submission, because assuming the data continue to go the way they have been, we will absolutely provide the Agency with the comfort that they need to allow this clinical trial to move forward.

Okay. That's helpful. Thank you.

Ren Benjamin, Rodman.

Good morning, and thanks for taking the question. This question has more of a mechanism of action point of view to it. As far as the embryonic stem cells, in particular the OPC1 cells are concerned, you mentioned earlier on in your prepared talk, and maybe I heard it wrong, that the cells survive for approximately 12 months. And so I was curious, A, how you determine that? And then if you can, could you extrapolate that to sort of a real-world scenario? Would these cells cease to function after 12 months, and then somehow affect the integration of the spinal track neurons? Or are you thinking of it more kind of like a supportive niche, where they come in, they cause the sprouting of axons and then can kind of die off on their on, but now these axons are already sprouted and doing their job?

Thanks for that, Ren. That question lets me know I wasn't clear in my prepared comments. So, first, the survival data are up to 12 months, and that's derived by injecting the cells into spinal cord-injured rats and keeping them alive for 3, 6, 9, 12 months. And then sacrificing the animals and doing intensive histology throughout their spinal cord. We obviously have stains that allow us to distinguish between rat myelin and rat glial cells versus human myelin and human glial cells. So the point I'm trying to make is that, there's no evidence of any loss of the cells for up to 12 months after injection. Now, that's interpreted by our neurology people as evidence that this is a permanent restoration of the glial population in the spinal cord-injured area. And that's the object of the exercise. So we expect these cells to live indefinitely and not have to -- do not expect to have to reinject them at all. That's obviously subject to continued survival work in both the animals, and once the human clinical trials start. But this is, like the rest of the cell types, purported to be a permanent and complete restoration of the tissue architecture and function, in this case, of the spinal cord-injured human. So the impact of myelination and of the neurotrophic factors indefinite, until the actual neurons have healed to the best of their ability. So this is really good news that these cells appear to survive indefinitely.

We will continue to follow some of these animals, but you have to understand that these are genetically immune-compromised spinal cord-injured rats who were also given cyclosporin, because remember, this is a xenogeneic thing, it's a human cell in an animal. And these animals require reverse isolation and manual expression of their bladders 3 times a day. It's an extraordinarily expensive and difficult animal model to maintain for 3 months, let alone 12 months. So these are data that we think it's important to generate, not only for the FDA and for our patients and investigators, but for ourselves to prove the principal. And we're doing the same kind of long-term survival experiments with cardiomyocites in heart failure and islets in the diabetic rats. So this is a really good news story, that OPC1s, manufactured according to our GNP protocol, frozen, thawed, and injected at full human doses in the spinal cord-injured rat appear to survive indefinitely.

Terrific. Thanks for the clarification. Kind of expanding on that then, but more in broader terms, can you take us through, from everything that you have learned from interacting with the FDA, this being one of the first embryonic stem cell products to come close to clinical testing now, what all have you learned from the FDA? So I guess what I'm trying to get at is, what are the steps necessary in this pre-IND package? I mean, you mentioned the 2,500 immuno-compromised rats, you mentioned that there are primate testing going on. Can you give a little bit more detail? How long does the FDA want you to follow these animals? I imagine that the toxicity studies in primates would be quite long. Would you be able to start a clinical trial before the final results are completed? Maybe just some details regarding your interactions.

Sure. First of all, I did not say we're doing any primate studies. In fact, we are doing none. No primate studies whatsoever. The Agency was not at all interested in our doing that for the simple reason that the efficacy, which has been overwhelmingly documented to their satisfaction and to ours, took place in the only validated model of spinal cord injury, which is the rat model. There's nothing validated in the monkey. And because we can, for every data in any of these tox studies, analyze hundreds of animals at a data point in rodents, compared to 1 or 2 animals in primates, because of the expense of the monkey model, the Agency is very happy to accept all of our tox data in this spinal cord-injured rat model. So what we've learned is that, first, we had quite a turnout at the Agency. The room was standing room only. Everybody showed up. I think they were extremely surprised, pleasantly, at the detail of our CMC section. We've done many, many GMP production runs demonstrating the uniformity of production, the narrowness of the product spec. This process really works. And that of course, is a fundamental improvement over any other cell therapy, where you don't have a self-renewing source or a scalable manufacturing process that resembles a biological. So that part of the meeting was terrific. They had no suggestions or issues with the whole CMC program.

Where we were a little surprised is the number of animals and the duration of follow-up that they wanted for biodistribution, standard tox, and tumor genicity. I would say that their biggest concern is the formation of tumors. And part of that comes from what I would call contaminated academic literature, where people are publishing animal experiments with cells that have not been grown in a way to exclude the possibility of there being contaminating rogue undifferentiated ES cells in them. We do that it way. We have not yet seen a single tumor in any of our IND-enabling studies. Nevertheless, they want full 12 months in several different settings, with increasing doses of OPCs. And in a separate 12-month study they want us to be spiking the OPCs with increasing doses of live undifferentiated ES cells, so they can get a feel for how pure the OPC prep needs to be to eliminate the possibility of tumor formation. So with the statistical package that's in front of them now, if we see no tumors in both of these 12-month studies, then at the 95% confidence level, we can predict less than a 1% chance of any tumor formation in any human receiving the full dose of cells.

So it's a very powerful package. The problem, of course, is that they could care less about how difficult it is to, and expensive it is to run these studies. I mean, this is not a simple, give an animal a tumor, and give them the drug, and see what happens. The spinal cord-injured model is difficult to start with. These are nude rats, so they have no immune systems. And we put on top of that a couple of immune-suppressive regimens to ensure that the cells survive for a long period of time so we can make valid observations about tox, tumor formation, and bio distribution. And we have had some loss of animals due to infection, because these are all handled under reverse isolation for up to 12 months. So it's a big deal in the sense of the extreme nature of the animal model that is the only one around capable of being scaled to provide us and the Agency with a sufficient number of animals at each data point. But, coming back to the helicopter view, there's really nothing different qualitatively about the regulatory path to an IND for embryonic stem cell-based therapies versus oligonucleotides or small molecules. It's the same bucket of information that they want. It's just that they are holding us to an extremely high standard because this is such a new technology, and we're willing to give them what they want.

Great. Finally, I may have missed this in the beginning from your prepared remarks, but can you give us an update on the vaccine program, and what's happening there?

Yes, sure. Thank you. I didn't mention that. Imminently, our IND will be submitted to the Agency for a hematological [inaudible], and at your conference, Ren, I'll unveil what that plan is. And just to say here that we have put a lot of thought into the next clinical program. And the parameters that we think are most important are 2. First and foremost, create a clinical protocol in a disease setting where we can generate very hard evidence that the exuberant immune responses our dendritic cells generate does in fact, have impact on disease progression. That's very hard to do in prostate cancer, as you know. So we have picked a malignancy in a particular therapeutic setting where we think that demonstration can be optimized. The second is that this is an indication that we think is a registration pathway, if we do, in fact, show robust immune responses, a great safety profile, as we have shown before, and impact on disease progression. So although it's -- it will be a Phase I/II, and not a Phase II had we gone straightforward into prostate cancer, the size and the definitive signal that we will get from this protocol is really worth that small step backward.

Okay. Sorry. Since I have you on the phone, 1 last question with the embryonic stem cell program. You mentioned that the studies -- well, the question is have the studies in rats started with the 12-month follow-up already? Or -- ?

Oh, yes, we'll have our first 12-month study done this December. So yes, we are very far along. By first quarter of next year, we will actually have most of the data that they have asked for. But we're having backup animals, and we're having parallel studies, which won't come out until the June/July timeframe to really hammer this down, so there's no wobble in the IND submission.

Right.

So we're very far along, and that's why I can be pretty confident that we expect to be able to deliver to the Agency exactly what they want, and perhaps more.

Perfect. Thank you very much.

Stephen Brozak, WBB Securities.

I'm looking at this, and you have belabored the point about the rodent studies that you're talking about, to the point where when you do achieve that proof of concept, it is going to be unique. How are you guys preparing for what I would think would be the potential collaboration, specifically in the -- amongst academia, that are going to come there and say, you've got something that's unique. Now there's going to be a whole different set of eyes that are going to be going and say, okay, even though there are some potential restrictions, this is so totally different, we want to go out there and exploit this. How are you -- and, frankly, in the past you guys have been also unique in terms of your willingness to collaborate. What are you planning on doing and what kind of a model are you going to use?

Well, I'm not quite sure I understand your question. If you're referring to the other elements of the program, namely, our activities with clinical trial sites and protocol generation, I can summarize that really quickly. We have now had initial and follow-up and qualification visits to over 20 neurotrauma centers in North America, every one of whom wants desperately to be part of this protocol. Their reasons are, we have shared with them what we have demonstrated, what is being generated in the IND-enabling studies, they are highly confident that this is a cell type that they want to put into their patient. The clinical protocol is nearly completely done, and has taken into account the variety of different mechanical approaches that are taken in the neurosurgical repair of the contusion injury. Remember, we're starting with complete thoracic lesion patients who have a chest lesion, and have complete loss of bowel, bladder, and lower extremity function, and that's for safety. So the protocol will be dose ascending, starting with a low dose, moving up to the therapeutic dose, just as in our 163L trial. So we formed an escrow committee, we are beginning now to write the IND in December. We have chosen our CRO. We have on staff people for the clinical protocol development, physicians and CRO-type people. And we are beginning the process of IRB contacts, because it is true that there will be lots of people who will have their toe in the water here. Not just the FDA and the investigators, but the IRBs. And we will have those addressed in parallel with the filing of the IND.

So you are -- obviously, everyone's hoping for good news, which you guys are monitoring very carefully. But the idea is that this will be something that will be seminal and that a lot of people will be looking to participate with you in. That's as simply as you can put it?

Yes. And the opportunity to fund some of this with Prop 71 is obviously not lost upon us. They have published their tome of philosophic tenants, which does include the reservation of considerable amounts of money for translational research for each clinical trial. I'm not sure whether money will be available in the '07 timeframe because of these lawsuits, and their possible appeal, but it's a pretty good bet that if money becomes available, this would be, I think, a program that would receive high attention from the Prop 71 people, given its uniqueness and its first in line. What I would also say that, this is not a do-or-die exercise here. The success of the platform clearly would be aided and abetted by a successful early spinal cord injury trial. But we are marching forward with cardiomyocites and islets, and we will take those into the clinic irrespective of how we do with the OPC1 product. Again, because the data in animals strongly reinforces the same principle, that cardiomyocites and islets are going to do the same thing with respect to permanent restoration of tissue function that we have now elegantly documented with OPC1 and spinal cord injuries.

Great. Well, I look forward to hearing about it. Thank you.

Mark Gross, California State University.

Thank you for taking my question. To date, have you seen any drug-related adverse events in the 163L trials?

No.

Okay. Excellent. I wonder if you could clarify the settlement between Start and ACT? Did ACT pay Start's legal expenses? And what is the $750,000 in milestone payments all about?

You're correct, there's a settlement in place to conclude the litigation, if you will, at the patent office, which is not uncommon. ACT lost the initial decisions, but filed appeals. And the appeals can be lengthy and expensive. The settlement to ACT and which is shared with the University of Massachusetts, is a small fraction of what we estimate our appeal costs, legal expenses related to the appeals, would be. The milestone payments reflect commercial events, and are modest in size against the significance of the events. So if we achieve those events, we'll be delighted to pay those small milestones.

And did ACT pay Start's legal expenses, or just their own?

Just their own.

Okay. Last question. As I understand -- ?

I'll be more explicit. ACT paid a portion of Start legal expenses. So from the point of handshake, to the point of signing the final agreements, ACT paid Start's legal expenses. And that amounted to some -- something just over $100,000.

Okay. Last question. As I understand the tentative protocol for the spinal cord injury trial, it's going to be randomized, but not blinded. And I'm just wondering about that. It seems like all the patients are going to be operated on anyway, that it wouldn't be that much harder to blind it and avoid any possible placebo effect.

Well, you can't really do that in a Phase I/II trial. That's sort of a standard no-no. The randomization is simply to try and increase the precision of our being able to say -- attribute positive outcomes to cells. These subjects come in right after the accident, and then there are several days of intensive evaluation. And as you could well imagine, an extraordinary amount of information flow to these patients, basically in terms of their outcome. And it's a pretty heavy message to receive that the MRI shows a complete thoracic lesion, and based on analysis of hundreds and thousands of patients like you, the odds of any recovery are zero. That's a big thing to swallow. And it's in that wake that we need to achieve informed consent to enter these subjects into our trial. And based on the feedback we have gotten from the neurosurgeons, they think some subjects will simply be afraid to add that cell burden to their recovery, and they will decline. And we'd ask those subjects to be in the control group, which simply receives standard neurosurgical reconstruction.

Now, that whole design will evaporate if even early on, we see inklings of responses in the subjects who receive cells. Obviously the patient care environment here, the patient advocacy groups, are all over this possibility, because there's no alternative, as they should be. So everyone's going to have their eye on this trial. And another thing to point out is because these are complete lesion subjects, even minor responses of improved bowel or bladder control or physical mobility, or even skin sensation is probably approvable. Because any of those improvements have a huge impact on the cost and quality of life. So, for example, Christopher Reeve died because of an infected decubitus ulcer that he could not feel. And because of the loss of neurotrophic activity to skin, these ulcers can literally form within an hour and break down and get infected, which is why these patients have to be rolled on an egg crate every hour. Well, if you have even 20% return of sensation, you will feel the breakdown of the skin and possibly even have more resistance against that occurring. That's a huge functional improvement and would be the basis of an approval.

So in some senses, the spinal cord injury program seems spectacular. And an intervention that, if works, would be a miracle. And in some ways that's perhaps true. But in a more objective way, embedded in the neurosurgical medicine of treating spinal cord injuries and the science of rehabilitation, small improvements in these complete lesion patients have dramatic impact. So that in some ways, the bar for approval in spinal cord injury is lower than you might think.

Very exciting. Thanks very much.

Dennis Williams, [inaudible].

What would be the worst case scenario for the Company if the patent office rejected the WARF patent?

I don't think there would be a worst case scenario. I think clearly, we have protection for all of the programs and all of the base technology we use on our program. I think it might make it somewhat easier for competitors to enter the field, perhaps if there was -- if there were no requirements to achieve a commercial license from Wisconsin. But we're so far ahead of the game, we have staked out our territory and the cell types that we're committed to, and they are protected. So again, I certainly don't predict or hope that the WARF patents become invalid for both specific and general purposes about patent prosecution rules in this country. But if the worst case were to occur, there would be virtually no impact on us.

Thank you.

Ladies and gentlemen, that concludes the question-and-answer portion of today's conference. I will turn the call back to Tom for any closing remarks.

I just appreciate the folks who turned in, and I appreciate your questions. They were all good. It also enabled me to clarify some points that I may not have made quite as clear in my prepared remarks. So thank you very much, and we look forward to chatting with you in the next quarter.

Thank you for your participation, ladies and gentlemen. Have a great day.