Plus Therapeutics Inc (PSTV) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Cytori Therapeutics first-quarter earnings results call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. (Operator Instructions).

Before we begin, we want to advise you that over the course of the call and question-and-answer session, forward-looking statements will be made regarding events, trends and business prospects which may affect Cytori's future operating results and financial position. Some of these risks and uncertainties are described under the Risk Factors section in Cytori's Securities and Exchange Commission filings, which Cytori advises you to review. Cytori assumes no responsibility to update or revise any forward-looking statements to reflect events, trends, or circumstances after the date they are made.

It is now my pleasure to turn the floor over to Chris Calhoun, Cytori's Chief Executive Officer. Sir, you may begin.

Great. Thank you, Paula. Good afternoon, and welcome to our first-quarter 2013 financial results and business update. I'm joined today by Dr. Marc Hedrick, our President; Mark Saad, our Chief Financial Officer; and Clyde Shores, our Executive Vice President of Marketing and Sales.

As I emphasized on our investor call in March, in order to drive shareholder value, we're focused on four primary objectives -- full enrollment in our ATHENA cardiovascular trial; completing all three objectives required in our BARDA contract; profitable revenue growth; and achievement of operational and financial performance goals.

I'm pleased with the progress we've made this quarter in all four areas. And I'd like to provide further details of these objectives, and explain the strategy in terms for reacquiring the outstanding Celution System manufacturing rights from the Olympus-Cytori joint venture.

I'll begin by discussing ATHENA and our clinical development pipeline more broadly. The goal of our ATHENA trial in the US is to evaluate Cytori's cell therapy for chronic ischemic heart failure. Rapid and successful enrollment is very important, and our goal is to have the trial fully enrolled by this summer, with six-month outcomes reported in the first half of 2014.

In Q1, more patients were screened, enrolled, and treated. However, one of our six sites had to withdraw from the trial. So, for the time being, we'll run the trial with only five sites. The reason for withdrawal was related to local IRB concerns unrelated to Cytori and ATHENA. No patients have been enrolled in ATHENA at this particular site. Our contingency plan is to bring another site on board, which we intend to do, but it may or may not contribute in the trial, depending on the timing.

In our European ADVANCE pivotal, or approval trial, of Cytori's cell therapy for acute myocardial infarction, enrollment is active and our current goal is to treat a minimum of 25 patients by the end of the year. Greater budget flexibility will allow us to further speed enrollment toward the interim goal of 72 patients, and ultimately to the full goal of enrolling 216 patients.

As a reminder, ATHENA is important because it helps lay a foundation for a US pivotal trial for heart failure, and keeps us on track to become the first approved cell therapy for heart disease in the US. We estimate that more than 2 million patients are diagnosed with advanced heart failure in the US. This represents a multibillion-dollar market opportunity. In addition, this data will be used to help support heart failure claims and market access in CE Mark-accepting countries.

On the other hand, ADVANCE may provide claims in Europe to treat heart attack patients, a potential $7 billion market in the EU alone. And it also provides Cytori an opportunity to work with key opinion leaders; solve important G5 regulatory objectives unique to each European country; educate numerous centers throughout the EU in the potential benefits of Cytori technology for cardiovascular disease; and provides a basis for a limited commercial launch for treating ischemic tissue.

Our second priority for this year is completing the three deliverables for our BARDA contract. You may recall that last year we won a contract with BARDA that could provide up to $106 million to fully fund the regulatory and clinical trials required by the FDA to gain approval for Cytori's Celution System for the treatment of soft tissue injuries.

Specifically, BARDA is seeking a primary medical countermeasure to the effects from a thermonuclear event. In this scenario, the nation's trauma systems would be overwhelmed with patients with radiation exposure and thermal burns. The key benefits of this contract to Cytori are that it provides a fully funded commercial pack that includes the world's largest customer, the US government; funds the development of our next-generation system; and provides at least one path through FDA for a meaningful clinical application in skin and soft tissue repair.

It's important to note that upon FDA approval, or in certain circumstances as deemed appropriate by BARDA prior to approval, the US government has the option to purchase and deploy the Celution System as a medical countermeasure for national preparedness. Once FDA approval is received, the Company has the right to commercialize its cell therapy in accordance with the claims allowed by the FDA.

I hope it's clear that this contract is a strong reflection of the scientific and clinical value of our technology, our leadership position, and progress that we have achieved over the last few years. What may not be as clear is that this contract is validating to our investigator-initiated study strategies. Key clinical data derived by our investigator-initiated studies were essential in showing the value of the technology to key decision-makers at BARDA.

Let me take a moment here to remind everyone about the details of the contract and funding triggers. The first phase, or the base period of the contract, is valued at $4.7 million. As specified in the contract, there are three objectives in the base period that would trigger up to $56 million in the second phase of contract options. These three objectives are to establish feasibility of Cytori's next-generation Celution System; to demonstrate that Cytori's therapeutic cell population could be obtained from patients with burn injury; and to show efficacy of Cytori's cell therapy product in a novel, preclinical, model of thermal burn with concomitant radiation exposure.

I want to commend the efforts and pace of activity by our team here at Cytori involved on the BARDA efforts. As of today, we've completed the first objective and submitted a report to BARDA containing data validating the performance of the next-generation system. And due to our BARDA teams' efforts and our outside collaborators supporting the preclinical work, we are tracking on or ahead of schedule for the other two objectives. Our stated timeline is to achieve all three proof-of-concept milestones as required under the contract in the first quarter of 2014. Cytori recognized $0.5 million in contract revenue toward the achievement of contract deliverables in the first quarter.

Now I will discuss our commercial progress. We are guiding to revenue of $15 million in 2013, which is comprised of approximate $12 million of product revenue, and $3 million from services provided under the BARDA contract. As previously guided, product revenue will be weighted toward the second half of 2013, and will come from a combination of sources. The growth in product sales in 2013 will come predominantly as a result of the Japan Class I clearance received September last year; recent addition of new geographic territories in Europe; the expansion of our Celution CE Mark for additional indications, including tissue ischemia; and intravascular delivery of Cytori's cell therapy derived from the Celution System.

We continue to anticipate that the majority of the 2013 product sales will come from Japan, which is consistent with historical trends, as discussed on our last call. Due to typical cultural and business practice differences, we will likely recognize much of the revenue from Japan upon payment of the accounts receivable, rather than the receipt of the purchase order and shipment of the product. This leads to a one-quarter lag of recognizing revenue in this market, and our revenue forecast reflects this accounting treatment in our guidance.

We continue to have strong demand for investigator-led studies using Celution and Cytori's cell therapy in Europe, Japan, and other areas around the world, which represent an important part of our commercial strategy. We're seeing a growing demand for Celution among academic researchers to investigate the use of cell therapy for specific areas of interest within their specialty. We can then leverage that data from these investigators, or their pilot studies, to secure grants or partnerships or expand clinical trials for the most promising indications, leading to expanded labeling and reimbursement. Our contract with BARDA exemplifies this strategy.

More recently, an early feasibility study in urinary incontinence in Japan has expanded to a larger, multicenter trial funded by the Japanese government. Nagoya University has received a grant in the amount of JPY500 million, or approximately $5 million, to fund the clinical trial, amend the labeling for this indication; and establish reimbursement. We anticipate that these investigator-led studies will be a growing aspect of our business strategy. Based on the current field activity, we anticipate an increase in both the number of new studies being initiated, as well as expansion of existing studies into larger patient populations -- in some cases, into the hundreds of patients -- and into multicenter studies.

In many cases, the funding is coming from external sources, such as hospitals and governments. In the EU, the recent Intravase approval, coupled with our previous certifications, will permit on-label sales of our technology for safe, intravascular use in tissue ischemia. We have a growing global sales funnel based on these approvals. Additionally, we're pursuing approvals in several new markets, including Australia, Canada and elsewhere, which we believe could come through later this year.

Finally, our PureGraft product line continues its positive sales trends. Record PureGraft revenues were reported with growth in both sales and units shipped in sequential quarters, as well as quarter over year-ago quarter. This trend reflects the increasing demand for this product, as well as the overall growth in fat grafting amongst plastic surgeons. We expect to bolster our PureGraft sales when we launch our product line extension later this year, targeting a significant market for small-volume fat grafting procedures.

Now let me spend some time discussing our recent decision to acquire Olympus' 50% ownership of our manufacturing joint venture. This stemmed from discussions that have been ongoing since late 2011, and were initiated at Cytori's request. Recall that in November 2011, our long-term partner, Olympus Corporation, began a series of significant and unanticipated changes to their key stakeholders; their Board; management; and their overall corporate strategy.

In the early days of these revelations, we became concerned about Olympus' ability to function as our manufacturing partner. Assuring Cytori has a solid control over its supply chain and key business decisions is critical to protecting shareholder value. As more information became public, we took proactive action to discuss this with Olympus leadership and our Board, and ultimately decided that it would be in the best interest to reacquire these rights, particularly if they could be obtained at a favorable valuation in terms.

The present agreement, signed yesterday, is the culmination of these negotiations, and gives us broad flexibility in the manufacturing supply chain, and associated costs, enables higher margins and a transition to the eventual manufacture of a smaller next-generation system. As part of the agreement, the Olympus-Cytori joint venture will return all rights to Cytori at closing, in exchange for alternative payment options, including $4.5 million within one year, or $6 million within two years.

We are, of course, very grateful for the strategic, technological, and financial support Olympus has provided Cytori over the years. In partnership with them, we've been able to enhance performance of the Celution technology, improve our operational capability, and increase our presence and visibility in Japan. Based on our internal capabilities to miniaturize the next-generation system, the added manufacturing flexibility, and the impact on margins, reacquiring the manufacturing rights was in the best near- and long-term interests of our business.

Turning to our financial performance. Combined product and government contract revenues in the first quarter of 2013 were $1.9 million compared to $1.4 million in first quarter of 2012. As previously mentioned, government contract revenues were $0.5 million in the first quarter of 2013, related mostly entirely to work performed under the BARDA contract, for which there were no comparable revenues recognized in the first quarter of 2012.

Gross profit was $600,000, or 46%, in the first quarter compared to $600,000, or 42%, in the first quarter of 2012. Gross margins are expected to increase substantially in the second half of 2013, as increased second-half revenues are realized. Research and development expenses were $3.7 million in the first quarter of 2013 compared to $2.8 million in the first quarter of 2012. This planned increase in research and development expense is mostly related to services performed under the BARDA contract in addition to clinical trial costs.

Sales, general, and administrative expenses were $6.1 million for the quarter compared to $6.3 million in the first quarter of 2012. These expenses were held flat, as planned. Net loss was reduced 18% to $7.7 million, or $0.11 per share, for the first quarter of 2013, compared to $9.3 million, or $0.16 per share, in the first quarter of 2012. Cytori ended the first quarter with $16.4 million in cash and cash equivalents, and $3 million in accounts receivable.

Further, Cytori reduced near- and long-term cash liabilities in the first quarter by approximately $4 million. A substantial portion of Cytori's recent and projected cash needs relate to principal payments in the existing term loan. The Company is in discussions with its lender group to extend the term of the loan and to defer principal payments to coincide with anticipated product sales, government contract payments, and other potential cash milestones.

While the Company is making progress in reducing the quarterly cash operating loss in parallel with growing the commercial business, we continue to pursue additional capital through strategic equity or commercialization agreements, asset divestitures, and modifying our term loan, as mentioned, all with the goal of minimizing shareholder dilution.

In closing, we're focused on delivering on our four principal objectives in 2013, which we believe will drive momentum in increasing shareholder value in both the near-term and the long-term.

Now, I'd like to take this opportunity to take questions you may have for me and my leadership team.

(Operator Instructions). Steve Brozak, WBB Securities.

Good afternoon, and thank you for the introductory update, but I do want to shift to something on the Japanese side. Nature Medicine just published a piece talking about how they're looking to provide fast-track approval for stem cell therapies. And obviously this is significant for everyone in the industry. But can you give us some color and some detail on how extensively you are integrated into being Japanese research system already? And I've got one follow-up question after that, please.

Hi, Steve. It's Marc Hedrick. I'll take that question. If you want to know more specifically about our understanding of the laws itself, I'm happy to answer that, but I'll let you drive that. Let me just answer your question, and provide more of an overview of where this fits into our strategy in Japan.

And I did read the article, and the timing was interesting. That article, in my view, just fundamentally validates what we've been doing in Japan and our focus on building A regenerative medicine infrastructure there, in my view. We've been there about eight years, I guess, in the Japanese market. We have a KK that's been positioned there for a long period of time; in fact, probably the leading regenerative medicine cell therapy company in Japan, arguably.

We've got about 50 systems in place; well over 10 investigator-initiated studies; as Chris said, some of them funded by the government. And I -- probably a quarter to half of our 5000 patients have been treated in Japan, so we are unbelievably focused on Japan. Over half our revenues are (technical difficulty) to come there.

What you may not know is over the last couple of years, we've been actively involved in terms of our regulatory group, clinical group, in shaping these emerging regulations. So we've been on the ground floor as these have been coming through the system. So, I think to distill it all down, we've got an office of about 20 people over there; a full business license; and in my view, because of that investment in time and effort over almost a decade, I think we're better positioned than any company in Japan to take advantage of this sea change in the market there.

Okay. And the follow-up actually has to deal with that. You are obviously a commercial entity, and given the fact that you are building up -- ramp-up within the United States government, and with everything that you're seeing now, what kind of a response do you get from potential collaborators? Because now they are obviously -- we are hearing about how large pharma, large medical device companies don't really have anything to replenish their revenue requirements.

What kind of a tone are you now seeing in terms of those types of discussions, as far as business partnering or potential developments going forward? Especially when you consider that the government has basically gone out there and said that they are working with you as a partner now. And I'll jump back in the queue after that.

I think we see it at a couple different levels. You see it globally when you talk to partners, hospitals, physicians; because they recognize that the government is really putting their weight behind the whole regenerative medicine cell therapy side. So you clearly see it there.

But you also see it from the perspective of the individual physicians who are increasingly coming to us because they have a recalcitrant or difficult clinical problem, and they know that we have the corporate infrastructure that we can help them get up and running clinically using cell therapy today.

So, we see people across the entire clinical landscape in Japan coming to us and saying, hey, I've got this problem, can you help us? And in many cases, we've already put together the clinical dossier for maybe another group, and so it's a relatively small changes that we have to put into place to get them up and running. So we're building sort of a scalable model to be able to do that. And it's very effective in Japan.

And then let me just say a little bit about Astellas, because that's a group that is very interested in what Cytori is doing. And as you know, we've had an option relationship with Astellas over a couple years that recently expired. But I can tell you, from my perspective, that relationship is as close as ever. They are a significant shareholder, have a Board observer seat; and what we hear is that, internally, at the senior management level, they are very committed to regenerative medicine, which is not something you commonly see at big pharma -- at least, we don't. So, there is an example, related to your question, of a company that is actively exploring ways to get into regenerative medicine. And I think we think a lot of that exploration is targeted towards us.

Great. Well, I appreciate the color and look forward to the details on what's going to happen in 2013. Thank you.

Yale Jen, ROTH Capital Partners.

Good afternoon, and thanks for taking the questions. The first one I have here is that, given you're going to maintain the cash guidance -- revenue guidance for about $15 million for the year -- in the first quarter, the product revenue seems a little bit light. So should we should we anticipate a more robust growth, or sequential growth, over the next three quarters?

Yes, hi. This is Clyde Shores. I think the first-quarter sales were about where we expected them. As we've guided in the last call and this call, we expect more significant growth in the second half of the year. And that will be reflected by the ramp-up that we'll see, particularly in Japan, now that we're in full swing of getting established with more distributors there. Because it was just September, as you may recall, that we got our license and also obtained a Class I approval. And so we've been actively engaged in expanding our relationships with quite a few distributors, more than 20 across Japan. And so it's a matter of establishing those relationships, enabling them to bring systems into their pipeline, and then working with them to take those out into the hospitals. And I think the new regulations that Marc just talked about will help to accelerate that as we move toward the end of the year.

So, we're on track as, we expect. And then, likewise, in Europe, we're utilizing the expanded CE Mark claims that we received last summer. And that's continued to broaden our usage, broaden the indications that physicians can treat in a given hospital. I like to use the analogy, it's very much like your iPhone or your iPad, where we have provided a platform with solutions. And now hospitals have more applications that they can use in that setting.

We expect the growth will also come as we expand into new customers throughout the countries in Europe, those where we've already had current hospitals and customers; and also new countries, where we've received regulatory approval and established new distributor relationships.

So we're on track for our guidance this year. And I feel good about what we've done in the first quarter and where we are headed for the next three quarters.

Just a little bit of follow-up here is that you mentioned the account principal differences in Japan versus the United States, or you only recognize the revenue when you receive the payment. So, would that be the $15 million revenue that you anticipated -- prior revenue anticipated for this year? From a P&L perspective, would that be a little bit spilled over to, let's say, 2014, in the first quarter?

Hey, Yale, it's Mark Saad. I'll pick that one up. The $15 million, first and foremost, is the combined product and cash contract revenue, which is essentially the BARDA contract revenue. So really those two go together to equal our guidance. So when you look at the P&L, you'll see the product revenue, you'll see that gross profit, and then below that you'll see the cash contract revenue. So when you aggregate the two -- the product revenue and the cash contract -- and that's where you get to the $15 million. And that's consistent with our expectations of what we expect to realize this fiscal year.

And we factor in what was suggested before and, frankly, was suggested on the call back in March, that just due to some of those contract differences, it's likely that, from US GAAP perspective, on collections we get the credit. So we'll see shipments increase over the course of this quarter. And that will give us a little bit of additional confidence. But then you can also look at last year, where fundamentally nearly 50% of the revenue -- product revenue revenues hit in Q4.

And I think that there is a little bit of that reality, given the capital nature of the product sales currently. But certainly from a second-half point of view, between increasing shipments in Q2; driving increased recognition in Q3 and Q4; that's how we see getting there and factor that into the $15 million.

Okay, last question here. Just a little bit of guidance in terms of the gross margin. I think this quarter is about 56%. Was that something we should anticipate, or you have a slight difference looking forward?

It's going to vary a lot, Yale. And the best way that I can guide people on that is you almost have to assume that there's a certain amount of physical overhead and staffing that you're going to have if you sell $1; $1 million; or $10 million. And so you really see that if you look at 2012 and look at the quarters. And look at where we were in Q1 of 2012, at 42%. Then you look at Q4 when we had north of $4 million in revenues, and we were in the mid-60s.

So when you get it normalized to a level of -- leveraging that fairly small but certainly meaningful manufacturing infrastructure that we have here, you see it getting into the 50s and 60s as you get into the $2 million, $3 million, $4 million per quarter in revenue. So it really is a direct function of the revenue line more than anything else. We are not dynamically changing our manufacturing capability. In many respects, it is what it is; and then the incremental labor and materials on the margin is fairly modest.

So you get a lot of leverage as you get up to the $2 million, $3 million, $4 million land. And so I think if you were to look at last year, and then scale your quarters appropriately for the revenue line, then I think it's a fairly direct relationships in terms of how you can expect the gross line to be. With some inherent variability, if it's an incremental Japan sale or European sale, you get mix issues. But the bigger issue overall is just fundamentally what's the revenue line.

Okay, great. Thanks a lot, and congrats on the start of the quarter.

Jason Kolbert, Maxim Group.

Hi, guys. I want to stick on Yale's theme for just a minute. And Mark, can you help me break down the revenue in terms of the contract revenue? Because if you're talking about $3 million in contract revenue, and we're talking about $12 million in product sales -- and, Yale is right, that's a pretty steep climb through the end of the year. So I assume you're talking about doing a better comp versus fourth-quarter 2012 when we look at our modeling for fourth-quarter 2013.

Sure, Jason. Let me make sure I answer your question. So, can I take the product revenue side of it first?

Yes, that would be great.

Great. Well, on one hand, you could look at -- one could -- and this isn't how the business works, by the way -- but from an object's point of view, you could look at Q4 and from a product revenue point of view of Q4 2012 and say, well, is it unreasonable to suggest, based on how they did in their first quarter out of the gate, with I'd say some -- a little bit of pent-up demand from some customers that were really looking for that approval. But yet, they represent a very small tip of the iceberg of what we believe the eligible customer base is for this Class I product.

But as a guidepoint, $4.3 million or so of Q4 product revenue in 2012, on an annualized basis, obviously gets you north of $16 million. We're saying $12 million for the year. So I think -- keep in mind (technical difficulty) second half, particularly Q4, are when you do see capital equipment sales loaded. You can look at companies like GE and the proportion of their MRIs and ultrasounds. Granted, Celution is a very small piece of equipment by comparison, but you still have a similar phenomenon. And I think the second half will reflect that.

In the sales funnel, when we get granular and we look at the customers, we look at where they are in the funnel, they line up to that. So we see specificity on a bottoms-up basis, and we see top-down factors as well that give us, currently, based on everything we see today, what we've said, which is current confidence in the full year.

And it's not linear, though. It's not each quarter incrementally. It's definitely -- we've used the word lumpy before, but it's not lumpy in a vacuum. It's lumpy with context coming from a very specific sales funnel.

And how should I deal with the contract revenue, which totaled $2.3 million, but the majority of which, going forward, is going to be BARDA? And if I just use the BARDA number in your total guidance, what do you think -- what you're really saying is that you're not going to have a lot of substantial contract revenue in the remaining three quarters of the year.

We had about $500,000 of BARDA contracts cash revenue in Q1. We've guided will have about $3 million for the year.

In just BARDA -- not including the development-related party revenue or other development revenue.

That additive. I'm focused just on BARDA.

But then, how do we get to $15 million? Because if I add those numbers up, I start to exceed $15 million.

We were specific in the guidance that it's product revenue and cash contract revenue.

I got it.

(Multiple speakers) cash contract revenue. The other development revenue is outside of that.

Got it, okay. Thank you. So let's switch gears a little bit and talk about clinical trials. As we start to talk about ATHENA in the US and that enrollment, you've ticked down from six sites to five sites. Can you give us any idea about how many patients have been treated so far?

Hi, Jason. I think we will continue as a Company to stick to a policy of really -- I think at the end of the year, we told everyone where we are. But we'll let you know when we get that trial done. We'll give you general qualitative statements about whether we are on track based on our guidance to get through that trial of enrollment perspective this summer. We clearly think we will, but --

You can understand where I'm going, Marc, because it's May, right? Why even bother to add another site in May if there's 12 weeks left, which puts us June, July, August? It sounds to me like -- how many patients could be expecting from a new site to bring online at this point? So you must have a pretty good understanding when you say we're going to be done by the summer, that you're going to get there.

We think we can get there with five sites, exactly.

Okay. Can we talk just a little bit about endpoints and how things are shaping up as you start to think about what will be required to move to the next phase, which, along the PMA pathway, would be a pivotal trial. Any ideas about how that trial might shape up -- size, duration, and what you might use for an endpoint?

I have a lot of ideas. And given where we are with ATHENA, that is a very active discussion that we're having right now. I assure you that's front and center of what we're thinking about, given the trajectory that we're on. However, I think it's premature right now to discuss what a potential follow-on trial in the US might look like.

But we're looking, not only at previous studies we performed with our cell type, but we're also looking at other cell therapy companies and their data. And all of that will be put into the mix as we design this follow-on trial that we hope to do.

Thank you. And that last question is a business model question. If we fast-forward to 2016, what do you anticipate the business model is going to look like? Will wrapped up and consumables be kind of a use fee, every time I use the device? Any idea in terms of how this will work out, particularly given the fact that you are placing systems all over the world now? You're creating the infrastructure. So how do you go about capitalizing it once you have a therapeutic approval that's based on a significant amount of your own invested R&D, to recapture that later?

Yes, that's a great question. And is everything crystal clear and dialed-in today? No. But we know an awful lot. And let me just review of few things that we know. The first thing is the capital equipment component. Getting to a business place where the capital equipment issue is a nonissue, we think is very important. In other words, moving towards a pure consumable, economically consumable base-driven model is important. And that's the benefit of the BARDA agreement and the next-generation system that we're making a lot of progress on. And I think that largely accomplishes that goal.

The second thing is, the economics will largely be driven on a per-patient basis, which is built around the consumable or cardiovascular perspective. As you know, very well, we've said that $8000 to $10,000 per consumable feels like the right price. Given the fact that these patients probably -- in the more significant heart failure side, with multiple readmissions to the hospital, chew up about $150,000 or more in resources per year from readmissions to the hospital, think that that consumable price is very good. At our margins, we are kind of into the 80% to 90%-plus margins, given that consumable bundle, on a per-treatment basis. And that's not even calculating in potential retreatments.

So, that would be -- the pharmacoeconomic data that we derive from our study will be geared towards making that value proposition. And I just say that recently I noticed that a peer company had talked about their pricing per treatment for a particulate particular patient course of cell therapy, and it was on the order of about $200,000. So we think that $10,000 per-treatment cost to the provider is incredibly realistic and doable.

Absolutely, I agree. But I -- one last question, which is the consumable package that will be used for heart failure -- or in this case, CMI -- you won't be able to switch to a different consumable -- I guess the consumable packages will be built around the indication. So, if you're doing heart failure, you use one consumable package. And if you're doing breast reconstruction or you're doing burns, it might be a very different consumable package with different price points. Is that correct?

Jason, I could not have answered your question any better than you just did. That's exactly right. So this will be fully differentiated, approved specifically by FDA. And because there's no CapEx, I think that ought to really drive penetration.

All right. Thanks, guys. I look forward to the clinical progress ahead, as you work your way through unit placements around the world. Thanks.

Keay Nakae, Ascendiant.

Yes, thank you. A couple questions about the Olympus joint venture. Initially, what does this require on your part, logistically?

Hi, Keay, it's Chris Calhoun. On the Olympus partnership, that's really been more on the development of the next-generation system that is very different than the one that we're developing now with the BARDA. So the system that was developed through the Olympus-Cytori joint venture is actually -- was really developed as a cardiac system, and all the bells and whistles, the very big, very expensive piece of equipment that we are electing not to manufacture.

We've taken that technology, and a lot of the advancements that were designed into that, miniaturized them, and really built them entirely into the new platform, the smaller, tabletop design that we have. Where we take the essentially the cost of goods of that system down from probably close to $100,000 with the Olympus partnership, down to somewhere on the order of $5000 to $10,000, based on this new design that we have internally.

So, all of the equipment that's around the world today, with the exception of the few systems that are involved in the ATHENA trial, have been made, serviced, including all the consumables, right here at Cytori. So we have the manufacturing; we have all the quality systems. In fact, we've got an audit going on right now that we do routinely. So all of those things are already in place. And there really isn't any new requirements for us to add new facilities or manufacturing capability. We really have that here.

And the advantage of this next-generation system, beyond the economics, is that it provides us tremendous flexibility. So by owning those rights, we can decide if we want to make systems ultimately based on usage and the economics, but regionally. So we might make them in places where we can bring the cost down that would be appropriate for those kind of markets.

Okay, great. Thanks for that. And then, second, as it pertains to the potential payment options, either $4.5 million in one year, $6 million in two years. What type of factors go into the decision of how to do that? And, if it's done, are those lump-sum payments? Or how should we think about modeling those out?

Yes, so, what we tried to do when we negotiated this -- and Olympus was actually very generous in trying to help us find a way to make this work -- was we wanted maximum flexibility here, particularly knowing that the next couple of years are really the critical time for us to get a transition from the investment that we've been making in the technology to a profit-oriented business model.

So, probably the next 12 to 18 months is probably the most critical for us in terms of cash. So what we wanted to do was to have as much flexibility with those payments as we could, that we would be able to determine, based on the strength of our balance sheet, how much we could pay or take that down.

And so the first is, we're paying about $220,000 up front. This comes from money that's already in the joint venture. So these are royalty payments that we've paid into the joint venture already for product royalties, because Cytori is making the products today but the JV really had the rights. We have paid royalties into the JV, which has effectively funded the JV over the last few years.

So there is a couple hundred thousand in there that's an existing balance that's jointly owned, but Olympus is allowing us to use that money to pay the upfront payment to them. And then, quarterly, we'll pay a royalty at the same rate effectively as we have been paying over the past on product sales that will, again, pull down that total amount of money we owe to Olympus.

And then, at the end of a one-year period -- a fiscal one-year, so not calendar year, but at the end of the 12-month period -- if we choose, we can pay whatever that remaining balance is. Let's say it's $4 million or so. If we have the capital, and the Board decides that that's the right use of capital, we'll pay that $4 million. If we decide to wait a year, then it will be $6 million, minus whatever those royalty payments have been up until that point. So, it gives us flexibility when we pay it.

Now, the one thing that we designed in was that if we bring in, let's say, over $35 million from whatever the source -- strategic partnership or a license deal -- then Olympus can call us to go ahead and pay that $4.5 million and be out of the liability.

Okay, yes, thanks. That was helpful. And I think everybody's happy to see you resolve that partnership. And then, finally, just a brief question on PureGraft. I know this doesn't amount to a lot of revenue, but you did talk about it being at a record amount. Are we talking tens of thousands a quarter; hundreds of thousands of quarter? Can you give us a sense of order of magnitude for that?

Hi, it's Clyde. Yes, we could say it's in the -- north of hundreds of thousands, globally. To give you an example, Q1, probably our record quarter, we treated about 1500 patients. And what we're excited about toward the end of the year is launching this line extension, which would allow us to address a much larger market than we compete in today.

Today, we're really getting percent of the overall general fat grafting market, where we are really competing against homebrew methods for distilling the fat. And in this new opportunity, we'll be really addressing the large, small-volume filler market, which is on the order in the United States of about 2 million procedures a year; about 2 million-plus procedures in the EU G5. With that kind of market opportunity, we think we've got a great product to address it. We see significant upside on PureGraft toward the end of the year.

Okay, very good. Thanks.

Marco Rodriguez, Stonegate Securities.

Hello. This is Dan Trang sitting in for Marco Rodriguez. I know you've gone over the Olympus joint venture. Wondering what was the reasoning behind that, knowing that you just went through a capital raise not too long ago. Just wanted to know what was the thought process there.

Well, this has been something that we've been negotiating for approximately 18 months or so. And it's really more of a strategic decision, on both fronts. One, on ours, to regain those rights around the manufacturing rights to the technology. We think those are valuable, going forward. It gives us flexibility to develop this next-generation system, this smaller system, which is really subject to the BARDA contract; and to be able to regain those margins as we are now getting these products out to the market, we could leverage that.

And I guess the opportunity really came up about 18 months or so ago, when Olympus underwent some of the issues that they've had, and they have fundamentally had to change their strategy. And really that allowed us to effectively, for pennies on the dollar, regain those rights that they had put a significant amount of money into.

So, I'd say it was as opportunistic as anything else. But it really fits in our strategy of controlling these core, critical, chain items, and then grabbing the margin from that.

Yes. And just a broad question, more directed toward Mark Saad. I know you've mentioned that gross margins have been lumpy in the past, and we can all see that. Kind of wondering as to any idea about when they might stabilize.

Sure, Dan. I think if you look at year-over-year, we are saying that from a total revenue -- a total product and cash contract, we're going from $9 million to $15 million this year. You take out the cash contract, you're really going from $9 million to $12 million. And if you -- we don't have a forward year plan off of that, but we certainly think the growth can accelerate based on what's been happening in the spring that's been coiled effectively for so many years, that's reaching a pivot point.

But if you were to look at the quarters where we exceeded $2 million, $3 million in revenue, I think you consistently see mid-50s, low-60s to mid-60s, on the gross margin line. And I by definition, if we're hitting that full-year goal, and then entering 2014, I think you're going to see that gross margin, certainly in the second half of the year, bump up a lot. And then, from where the business stands from a growth and product mix point of view, come Q1 2014, our objective is to increase the predictability through consumables, of course.

And at what time are you going to see most of those revenues from consumables versus systems? We're just not there yet. But that's the key to predictability. So, the benefit of being where we're at is a lot of revenue to get in this first phase of getting hyper-proprietary systems out into markets where we've got approval, then a long runway to get that done.

But the transition point to predictability is all about the consumable. So, admittedly, we're not there yet. But at a minimum, if you can see that revenue from the overall business getting to $2 million, $3 million, $4 million per quarter -- and obviously we think it should go much more from there -- that's when you're going to see the fundamentally higher margin levels.

Okay, thank you.

Yale Jen, ROTH Capital.

Hi, thanks for taking the follow-up. Just a little bit in terms of the precise data propagation to the long-term -- on the current the data propagation. Do you guys have any more color in terms of the timing of that, maybe?

Hi, Yale, it's Marc. No, I think it's coming. And we're in the process with the journal, and hopefully soon, but no specific update at this point.

Could that be the second half of this year? Or it could be even many years?

I think it could be second half of the year, yes.

Okay, great. Thanks a lot. Appreciate it.

At this time, there are no further questions. I would now like to turn the floor back over to Chris Calhoun for any additional or closing remarks.

For more than a decade, there's been much discussion around the hope and promise of regenerative medicine and cell therapy. Cytori is uniquely delivering on that promise today, improving the lives of thousands of patients around the world. The validation and support of hospitals and governments, Cytori's technology is at the epicenter of this innovation in this emerging new field in medicine.

As a Company, we're expanding our platform and our markets; more efficiently utilizing capital in driving toward profitable revenue growth; and, ultimately, toward a highly profitable and high-growth company. We want to thank you for your interest and your support for our Company, and for your time today. Thank you very much.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and had a wonderful day.