Plus Therapeutics Inc (PSTV) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Cytori Therapeutics second 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 the 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 advise 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 Cytori's second quarter 2013 financial results and business update. I have 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 May, in order to drive shareholder value, we are focused on four primary objectives this year. Full enrollment in our ATHENA chronic heart failure trial, completion of all three objectives required in our BARDA contract, profitable revenue growth, and achievement of operational and financial performance goals. I am pleased with the progress we have made this quarter in all four areas.

Moving forward, we have narrowed our focus by divesting the non-core PureGraft product line and by our decision announced today to focus our clinical resources for cardiovascular indications to ATHENA. Let's start by discussing the ATHENA trial and our overall cardiac development pipeline.

ATHENA is a prospective multicenter, double-blind, randomized and placebo-controlled clinical trial investigating Cytori's cell therapy in 45 patients with chronic ischemic heart failure. At present, 16 patients have been treated.

The majority of patients have been treated at two trial centers which began treating patients essentially in Q4 of 2012. Two new trial centers began enrolling in the second quarter and a third began enrolling in July. Three additional trial centers are expected to begin enrolling patients in September.

In June, the FDA approved expanding the ATHENA trial from six trial centers to a total of eight. Based on the average enrollment rates of the active centers to date, and the anticipated average enrollment rate going forward, it is one patient per month per center. At this rate, full enrollment will be achieved in the fourth quarter, a few months behind our initial timeline for enrollment.

Importantly, presentation for top line, six-month data remains on schedule for the first half of 2014. Cytori has received approval from the FDA to expand the ATHENA program to include a higher cell dose. This parallel study, named ATHENA 2, mirrors the ATHENA trial. ATHENA 2 is a prospective multi-center, double-blind, 45-patient trial with 2 to 1 randomization of cells to placebo.

We expect the trial to begin enrolling in the fourth quarter at up to 10 centers immediately following the full enrollment of ATHENA. Complete enrollment of ATHENA 2 is anticipated during the first half of 2014. This is not expected to delay the initiation of the US pivotal trial planned for 2015.

Preparations are underway for a meeting with the FDA to receive input and guidance of the pivotal trial requirements, including the target patient population, target clinical indication, and defining the primary and secondary trial endpoints. This is an important next step in completing our cardiovascular roadmap toward achieving market access, which includes FDA approval for a specific cardiovascular indication, US reimbursement, and establishing a strategic partnership.

Now I will address the ADVANCE trial. ADVANCE is the Company's European clinical trial for acute myocardial infarction, or heart attacks. The enrollment goal set for ADVANCE for this year is 25 patients and, to date, the trial has enrolled 23.

As we noted last quarter, we have been comprehensively evaluating our global cardiovascular pipeline and strategy in context of our overall resources, resource utilization, and development priorities to reach a decision about how to move forward with the ADVANCE trial as we neared the 25-patient goal. We have decided to discontinue enrollment in the ADVANCE trial once it has achieved the 2013 target enrollment goal of 25 patients or on September 30.

I want to be very clear that all evidence to date supports a strong safety profile. The patients enrolled in the trial will continue to be followed according to the protocol and the outcomes will add to the existing safety and feasibility data from the APOLLO acute myocardial infarction trial. Our decision to conclude ADVANCE is based on several considerations.

Each country in Europe interprets and implements GMP requirements in a unique fashion. Satisfying this disparate and evolving requirements is proving to be more challenging and costly than anticipated. Furthermore, certain European regulatory authorities at institutional review boards have rendered mixed opinions on approving the trial with a placebo control arm, a key factor in showing scientifically valid efficacy in this trial.

In short, the overall fluidity and lack of standardization in the regulatory environment in Europe around device-based cell therapy and clinical trials will continue to make it increasingly difficult to forecast and manage associated costs and resources. Management will focus internal and financial resources on the highest clinical development priority, which is the expanded US ATHENA trial.

We expect additional safety and efficacy data to be obtained from the continued follow-up of the ADVANCE patients, which will serve to further strengthen Cytori's overall cardiac clinical data. We want to thank all of the patients who have participated in the ADVANCE clinical trial as well as all of the physicians, investigators, nurses, trial coordinators, technicians, CROs, core laboratory teams, advisory board members, Cytori employees, and all of the others who have worked so hard in the development and execution of this clinical trial. It takes an incredible effort by many talented people to bring a trial such as ADVANCE to life.

Our second core priority this year is to complete the three deliverables in our BARDA contract. Our BARDA contract awarded last fall provides for up to $106 million to fully fund the regulatory and clinical trials required by FDA to gain approval for Cytori's Celution System for the treatment of targeted soft tissue injuries.

Specifically, BARDA is seeking a primary medical countermeasure to treat a combined injury associated with radiation exposure and thermal burns. The key benefits of this contract to Cytori are that it provides nondilutive fully funded development of Cytori's technology in the US for targeted indications, establishes a clear roadmap for not only a broad commercial product and market in the US, but also establishes a relationship with the world's largest potential customer, the US government. And it funds development of our next-generation Celution System.

Upon FDA approval, or prior to approval in certain circumstances as deemed appropriate by BARDA, the US government has the option to purchase and deploy the Celution System as a medical countermeasure for national preparedness. Should FDA approval be received after clinical trials, the Company has the right to broadly commercialize its products in accordance with the claims allowed by the FDA.

The first phase, or the base period of the contract, is valued at up to $4.7 million. As specified in the contract, there are three objectives in the base period. Completing the first phase will allow Cytori to move into the larger second phase of the contract, valued at up to $56 million.

The three base period objectives are, one, to validate feasibility of a miniaturized, next generation Celution System. Two, to demonstrate that Cytori's therapeutic cell population could be obtained from patients with severe full thickness burn injury, and, three, to show efficacy of Cytori cell therapy product in a novel, preclinical model of thermal burn with concomitant radiation exposure.

We are well on our way to completing the base period objectives and moving into the larger second phase of the contract. Cytori completed the first objective during the first quarter of 2013.

We have now received and evaluated tissue from a number of patients with severe full thickness burns. In every case, the Celution System was able to process patient tissue from the area of the burn injury with a high cell yield and high cell viability. This has been additionally compared to tissue from an area away from the burn injury in at least one of the patients with consistent cell yields and viability.

Additionally, these data have been compared to Cytori's extensive internal database of cell yield and viability from non-burn injury patients' tissue, which includes more than 5000 patients. And, through this, we have again confirmed that cell yields and viability are in the normal range despite being harvested from tissue associated with severe full thickness burns. We are waiting on one last patient sample to complete this second objective and anticipate that this will be completed during this current quarter.

The remaining milestone requires a preclinical study to determine the safety and efficacy of cells in animals receiving a combined radiation exposure and thermal burn. This novel trial design is complex and the model requires extensive planning and pretrial developments including independent, in vivo preclinical work to establish the radiation exposure protocol and, separately, the thermal injury model, which required in vivo development for establishing consistent and reproducible burn injuries.

This preparatory work has been completed. The preclinical study is now actively treating and evaluating combined injury subjects. Data from the study and other associated studies that are part of this program, which are underway in parallel, are already beginning to come in.

We expect to have all of this work complete and the final study report submitted to BARDA by the first quarter of 2014, if not sooner. Based on this progress, we are on track to hold an in-process review meeting with BARDA and other stakeholders during the first quarter of 2014. This meeting is the key step towards progressing to the second phase of the contract, worth up to $56 million in development funding to Cytori.

Moving to our commercial business, we continue to build the Cytori brand, which represents leadership in the emerging cell therapy field through a strong scientific foundation and a growing clinical experience -- clinical experience that is the most expensive of any company in the field. Coupled with our expanding regulatory approvals around the world, the Celution System is becoming the standard source for accessing clinical grade cells for therapy and is now being supported by institutions and governments around the world.

Our commercial strategy and business model reflect this. We are focused on providing systems and consumables, primarily to academic research institutions performing their own investigator-initiated studies or clinical case series, as well as establishing indication-specific patient registries.

The investigator-initiated studies are of strategic significance in that they identify potential new therapeutic applications for Cytori cell therapy, and are generating a vast amount of safety data and signals of efficacy. These studies create awareness and familiarity amongst physicians who are the thought leaders and influencers in their respective medical disciplines, as well as for patients who may have unmet medical needs which are being studied.

Additionally, we are establishing indication-specific patient registries so that groups of physicians can pool their data and share their experiences. This data can be used to support expanded indications for use, product reimbursement, and market adoption.

A good example of this is our new registry for chronic heart failure in Europe. With our recent CE Mark for Intervase, physicians can now treat patients intravascularly, meaning they can treat patients with diseases such as heart failure, heart attacks, stroke, critical limb ischemia, and other injuries or diseases where cells need to be delivered into their vascular system versus directly into the tissue.

Through the chronic heart failure patient registry, physicians and hospitals can participate in a global prospective clinical outcomes and practice patterns study. Access to the registry can help facilitate local IRB approvals and participation in future data presentations and publications. And, for Cytori, it help us capture value -- valuable utilization in patient outcomes data back that can support regulatory and reimbursement efforts as well as for driving market adoption.

Product revenue growth in the second half of the year will be driven by expanded research and general clinical use based on recent regulatory approvals, including Class I registration in Japan, expanded Celution CE Mark clearance in Europe for intravascular delivery, and tissue ischemia, and approvals in country registrations and other reasons throughout the world.

We are well-positioned in Japan to capitalize on evolving legislation that could create an accelerated, risk-adjusted path to market for cell therapies. This is due to several investigator-initiated studies planned or ongoing by Cytori's customers in accordance with the most recent Japanese Ministry of Health guidelines on cell therapy, clinical trials, and the established infrastructure with our development, regulatory, and commercial teams already in place in Japan.

In Europe, the recent Intervase approval, coupled with our previous certifications, will permit on-label sales of our technology for intravascular youth and tissue ischemia. We have a growing and strong global sales funnel and believe that we are on track to achieve the revenue guidance for the year.

Following quarter end, we received notice from the Australian Therapeutic Goods Administration that the Celution System has been approved for commercial sale in Australia. This approval will allow physicians to utilize Celution System across a variety of indications for patients in Australia. The Celution System has also been registered for commercial sale in New Zealand.

These developments are an important step toward expanding market access in this region, securing therapeutic claims and ultimately reimbursement. What this means nearer term is that, through direct sales efforts and distributors, we will begin targeting select thought leaders and early adopters of Cytori's cell therapy at private hospitals and clinics. This will help build clinical experience that will ultimately support our pursuit of reimbursement that will allow for greater penetration in both public and private hospitals.

Last week, we entered agreements with Bimini Technologies to divest the non-core PureGraft line of products in exchange for upfront, $5 million cash payment, plus up to an additional $10 million in commercial milestone payments. In addition, Bimini Technologies licensed exclusive worldwide rights to develop and sell the Celution System for alopecia, or hair loss, in exchange for a perpetual royalty on sales.

Cytori retains certain rights to PureGraft for cell-enriched procedures and for cell and tissue banking. This divestiture narrows Cytori's operational focus, supporting the Company's primary goal of developing cell-based therapies while retaining the technology for core markets and potential upsides on future sales.

Turning to our financial performance, total revenues for the first six months of 2013 were $6 million compared to $5.9 million for the first six months of 2012. Total revenue for the first six months of 2013 included $2.8 million in product sales and $1.4 million in cash contract revenue.

Total product and cash contract revenues for the second quarter of 2013 were $2.3 million compared to $1.9 million in the second quarter of 2012. Gross profit for the first six months and quarter ended June 30, 2013 were $1.4 million and $0.8 million, respectively, compared to $1.5 million and $0.9 million, respectively, for the first six months and quarter ended June 30, 2012.

Gross margins are expected to increase in the second half of 2013 as increased revenues are realized. Net loss for the first six months of 2013 was $10.9 million or $0.16 per share, compared to $17.2 million, or $0.30 per share in the prior year. Net loss for the second quarter 2013 was $3.2 million or $0.05 per share, compared to $7.9 million or $0.13 per share in the second quarter of 2012.

Cytori ended the quarter with $16.5 million of cash, equivalents, and accounts receivable. Subsequent to the end of the quarter, we received $5 million from the divestiture of the PureGraft product line. During the first half, we increased R&D expenses as planned to support the ATHENA trial and perform reimbursed services under the BARDA contract, and held SG&A expenses flat.

Recall, revenue guidance for the year was $15 million, including $12 million in product revenues and approximately $3 million from BARDA. As a result of the PureGraft divestiture, the projected product sales for 2013 will be reduced by $1 million. As previously guided, we anticipate product sales to be weighted to the second half of 2013 as we realize the effects from recent regulatory approvals in Japan, Europe, and now Australia.

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

Our major milestones for the next 12 months include the following. Complete enrollment in the ATHENA trial, report six-month outcomes from the ATHENA trial, initiate enrollment in the higher dose ATHENA 2 trial, and then complete enrollment in that ATHENA 2 trial; achieve proof of concept milestones in the BARDA contract and qualifying Cytori for up to $56 million in additional development funding, achieve product and contract revenue objectives, publish the 18-month outcomes from the precise European chronic ischemic heart failure trial, and continue to strengthen the Company's patent position.

I would like to take this opportunity to address any questions you have for me or my leadership team.

(Operator Instructions) Jason Kolbert, Maxim.

A couple of questions. Can we talk a little bit about ATHENA and the enrollment and how you came to the decision to add a high-dose arm? What was the science behind that?

And how can you say that you are on track to start a pivotal trial without seeing the results from that high-dose arm? If I am the FDA, there is no way I let you go pivotal until I see the results of both ATHENA 1 and ATHENA 2.

Jason, hi. Mark is on the line. He is not here. He is going to address the ATHENA question.

Hey, Jason. Thanks for the question. Regarding -- you kind of brought up two points. One is the ATHENA enrollment and the second one was the issue of the dose.

In terms of the dose, which I think was your primary question, you're right; it is a scientific question. And this wasn't a mandated additional dose by FDA. It is voluntary on our part. We think it sheds important scientific information as to the minimum effective dose, which we would then take into the pivotal.

Yes, we never said that we wouldn't wait for both dosing data to go into a pivotal. But if we could lower the amount of fat that we are taking and make it easier on the patient, and take that dose to the clinic and get an equivalent efficacy signal, then we think that is a good thing to do.

So it certainly checks the box scientifically with respect to how the technology is working, what the appropriate dose is, and so forth. We think it helps in terms of planning the pivotal with FDA. And, also, we think, based on our conversations with potential partners, that it is data that they are interested in, scientifically, in terms of having confidence that we are going to see it, in fact, ultimately in the pivotal.

I mean, I understand what you said, but there is a host of other implications. For example, the higher dose arm at 0.8 million, does that change the harvest size, because I would think that you have the capacity to pull the 0.8 million, 800,000 cells out of either harvest. Is that not the case?

Yes. I think that the -- we take more fat tissue from these patients than we need, typically, to have a buffer. So there doesn't appear to be any complication related to the harvest. So whether you take 200 cc's, 300 cc's or more, there is no specific clinical impact to the patient. I think it's more about finding the minimum effective dose in the heart than it is anything else.

Right. But you are going up in dose, not down in dose. So is there a reason to believe that you are not hitting critical mass at 0.4 million, based on some of the prior data sets and particularly some of the MVO2 numbers that we have previously discussed?

Not at all. In fact, as you know, most of the studies in aggregate tend to show that there is -- a lower dose seems to be more effective oftentimes than a higher dose.

Sure. You get crowding. So when you go to the (multiple speakers) higher dose -- sorry.

No, go ahead.

So when you go to the higher dose, does this change the amount of NOGA time and the number of injection sites? Is it just more cells per injection or is it an increase in the number of injections?

No. It's the same number of injections, higher concentration cells. We think it sheds more scientific data to inform the pivotal and help assure the success of the pivotal and we think it is data that partners will potentially want as we begin those discussions.

Okay. Good. Thank you, Mark. And can you address the other question, which is really just understanding what has been going on with enrollment? Because, when we started 2013, I was very excited. I looked at [N equals 45] as a very easy number to hit. We were looking at six centers.

And here we are in August and I am a little disappointed that we have only hit 16 patients across two sites. It seems like, given the size and breadth of this market, that this would be a very easy number to hit relatively quickly. In the big scheme of things, I understand. It doesn't really matter. But in the micro scheme of Wall Street expectations, it seems like we are six months behind now.

Yes. So the question is, really, why the delay. And I think, last May on the call we felt like we still had a good chance to hit our end of summer deadline. As you know, with trials like this, there's often a lag phase and then, at the end, you see a significant increase in enrollment. That's the expectation.

However, when you are forecasting a new trial, new country, new therapy, where you're actually harvesting tissue, processing it, putting it back in the heart, it's often difficult to really nail the forecast. So we build a forecast, based on the best available information, talk to the KOLs, look at the previous trial, which only had been precise at primarily one center in Europe, and put in some buffer, and try to manage the trial to that.

But, when you have a small trial like this -- as you mentioned, 45 patients, originally only up to six centers -- when you have specific site issues, in this case we had one issue that we mentioned on the last call and a second site issue in terms of an investigator leaving the institution. That's a significant impact to a small trial. When you see enrollment or anticipate seeing enrollment jumping, towards the end of the trial, that could have a relatively significant impact on the trial.

So as we watched the enrollment, went forward, we recognized it was a risk. It may take longer. We begin to make some aggressive changes to speed enrollment in terms of adding sites, going back to the FDA, taking a strong look at the inclusion/exclusion criteria, moving sites that had issues to additional sites within the same system and so forth. So we are continuing to respond to the challenges that we have in a trial like this.

And we are still optimistic that we can get this done relatively quickly. And, as we move forward with this trial, we will just get better and better in terms of our ability to forecast a very novel trial such as this in the US.

Okay. Fair enough. I totally understand. And, congratulations on BARDA. It sounds like you are making lots of progress there.

I guess the only other question I would ask before I jump in queue and give someone else a chance is, you talked a little bit about getting ready to elucidate what a pivotal trial design would look like. I am assuming that you are not really ready to discuss that yet, though.

Yes. I think it's way too early. We will be meeting with the FDA, and, you can imagine, it is a relatively standard discussion about endpoints, inclusion/exclusion criteria, number of patients, key attributes of the protocol. And, as you mentioned, we need a scientific data from the ATHENA 1 study and the sister study before we can fully define these.

But we think, given where we are where we think we are going to be, with these two studies, we think we are going to be ready relatively quickly to have that discussion with the FDA.

Okay. Thanks for the update. I'll jump back in the queue.

Jason, I just want to add one more comment on looking at the ATHENA 2 trial, that, as we evaluated that, as Mark has described, getting this first trial up and running, it's a very complex trial. And it took quite a bit of work to get it up and going.

But ATHENA 2 will be very efficient because a lot of the trial would be conducted at the same centers, using the same IRBs, and the contracts have been developed, the budgets have been developed, so there is a huge efficiency in just rolling right into that second dose group. And I think that will enroll very quickly.

The FDA is also allowing us to expand to 10 centers, but I think the majority of the work will be done with the eight that will already be up and running. I think there is a tremendous efficiency in getting that trial enrolled quickly to get to data potentially even late in 2014, that that really doesn't interfere in the timeline that we had originally put together on getting to a pivotal trial because we know that is going to take some work with FDA and preparing protocols and stuff.

And a lot of that work can be done as those patients are enrolled and waiting for follow-up. So I think, as we really looked at the potential risks of FDA coming back and wanting more patients or to see a dose escalation, obviously we have argued, as you have, that we think higher doses may or may not show any improvement or benefit. But it is certainly something that we all are aware that FDA will want to see and potentially want to see in this trial.

So we decided it was the right thing to do to just leverage that. And, without losing any time having to start over and really lose potentially a year or more, and to leverage the base of operations we already have in that investment, it was a very easy decision to really create this next group of patients and strengthen that trial and strengthen our position going into the pivotal.

Thanks, Chris. That makes a lot of sense and it doesn't fall, to me, on deaf ears that, by doing this, you also create infrastructure and key high-volume centers and also pave the way for the infrastructure for the pivotal trial.

So I certainly see the benefit in the utility, and that's why I am trying to be careful not to pander to micromanaging the timeline versus doing what is right in terms of both the science and the right clinical steps, which, here, are also double in with creating the infrastructure around where the real potential is, I believe, for Cytori, which is in developing a therapeutic out of this. So thank you, I appreciate the updates.

Absolutely. Thank you.

Stephen Brozak, WBB Securities.

Good afternoon, gentlemen. I will be quick and ask one question, but it's going to be a pretty, quote/unquote, global question.

You obviously have had remarkably good news out of Australia and you have had news from the entirety of the globe. Can you give us a round-the-world tour of where you see -- because people don't understand that regenerative medicine isn't uniform throughout the world? Can you see what the highlights are of your programs globally and how each of them support one another and where you think the advantages you have each of these programs are, and specifically, over the next 12 months?

And I will literally ask that and jump back in the queue. Thank you.

Great. Steve, it is Chris. I think you followed through with what you said. It's one question, but it's a big question. And, as I am kind of looking globally at regenerative medicine in this really nascent but emerging field that we are collectively -- we, as peers; the peer companies are really creating.

Let's start in Asia, first, which is probably unusual, but in Japan regenerative medicine has become really one of the premier government-based objectives for the country. And it's an aging population and there's technology that's been developed there that sort of facilitates the government really supporting regenerative medicine on a number of different levels.

And so as I am looking at the world, I think Japan is really standing out as not only really the most accessible place for regenerative medicine, but a place that is responding to this new field; that it's a new technology in terms from -- everything from their policies and their reimbursement, to the regulations and how they are thinking about regenerative medicine. So the opportunities in Japan, I think, are the most significant in the nearer term. Japan is probably still ranking as the second-largest medical market in the world.

China is probably closely approaching it, but it is right in there. And I think that the need for regenerative therapies there are pretty significant. And so, as we look at what the government there is doing, they are taking a strong look at their regulatory process.

They are trying to create fast track options where, if you show safety and efficacy data in small studies, that they can open up markets and then support it with reimbursement to get technology to patients quickly. I think this is the kind of forward thinking and action that government -- their government is taking that is really a leadership role of anywhere I have seen in the world. So I think, in the nearer term, Japan really represents, in my mind, the most important place for investment in early development of regenerative medicine.

To a lesser extent, we are seeing similar stuff across broader Asia. I think China is catching up with bringing technology in and looking at opportunities there. We have been more careful about going into China, but I think that will rapidly catch up.

Going around to Europe, I am finding it is probably moving the other way in Europe. I think that, as the Union, which we think of as kind of one regulatory framework and one kind of international system, really isn't the case. And I am seeing more fragmentation, more individual country division between the regulatory process, how they manage GMP, requirements, reimbursement certainly, data and ethics.

And, I mean, it's just Europe, I think, is fragmenting and becoming a much more challenging market from a regulatory point of view and from a market point of view. I think the economic considerations there are also significant. So it doesn't mean that the opportunity isn't extremely big, but for our point of view, we have shifted our focus there to really putting our attention on investigator-initiated studies that are typically either government-funded or institution funded, grant funded, and now registries, where we will create a target indication patient registry that is a global registry and then getting key academic leaders to participate in that to drive data, to drive utilization that can support reimbursement, expanded claims, and market access. So I think we are seeing clearly a shift in the European market.

And the US market, I think, we have had our different approaches with FDA. It is crystal clear right now that the value of Cytori will come in the form of US clinical data and our focus is really turning towards driving really, really well done US clinical trials and clinical data. And we are starting in cardiac, but we will expand and try to leverage our base as we have the resources to do that. But right now we are focused on cardiovascular.

I think that FDA is becoming much more supportive and accepting of the risk-adjusted approaches to regenerative medicine. And we have now put in numerous applications, numerous modifications to the protocol, adding centers, the second trial. And in every single case, FDA has been very, very responsive, easy to work with, and fair and open to really helping us bring this technology to patients and get it through the trial process.

So I think it's a matter of time here and I don't see anybody that is really ahead of us in the US. I think that we will see a big market here, but we need to invest in the clinical trials first. I think there are some other markets -- emerging markets around the world that are going to be more opportunistic and we will look at those based on can we really drive profitable business there, or are they going to be tertiary markets that we need to wait for a future time to leverage. And we are kind of doing that on a country by country basis.

But, North America; I'd say Canada is an important market for us, potentially even Mexico, and there's opportunities there that we are pursuing. And then, Australia, New Zealand, you saw that open up this quarter. We had approval from TGA to do some patient work in Australia for the last couple of years. So we have already been seeding that market with a couple of core centers that have treated over 60, maybe as many as 80 patients very successfully. So I think that we will see that market being an important, but small market. And that is how we approach it.

So, hopefully, that kind of gives you the travel around the world global picture. But, look, I think that our approach to regenerative medicine is being well received. We are creating an autologous against point of care system. We are not manipulating cells. The business model really works.

It is affordable. These are not $200,000 therapies. They are a few thousand dollars to maybe $5000 or $10,000 for vascular- - very affordable, very easy to do, and incredibly safe.

And that's what is really driving the utilization of our technology at the support of it by -- I don't know, Marc, how many governments now we have grant funding for and investigator-led stuff? It's probably more than a dozen governments that are funding our technology and clinical use around the world. And that is growing.

Well, I appreciate the around the world tour, and I look forward to the next conference call and execution of what takes place with your trials here in the states. Thank you.

Thanks, Steve.

Keay Nakae, Ascendiant.

Thank you. I was wondering if you could expand on the comments that you touched upon a couple times regarding the regulatory environment in Japan. Is this something that is now starting to become more formalized, delineating clearer paths to market?

And if it does involve smaller studies, are the current investigator-led studies of the size and scope that would be large enough relative to their definition of small to qualify for the types of approvals that you think are going to open up there?

I think this really represents a tremendous opportunity and we will see how this plays out. But starting in probably March or so, the government became pretty public about supporting regenerative medicine -- an aggressive, really unprecedented shift in the regulatory process, that allows for select regenerative medicine therapy. So these will be named kind of on a list -- regenerative medicine therapies that are allowed to pursue what they are considering a fast-track regulatory approach.

And if this legislation goes through, you are exactly right. What that would allow for is small -- either government-funded or sponsored or independently managed clinical trials in Japan that could be as small as maybe 30 to 60 patients that show not only safety, but a strong efficacy signal in core target diseases.

If the efficacy [signal] is weaker, then you may not have to follow the traditional really large trials, but maybe a larger but not massive trial to get there. So they are trying to facilitate bringing technology quicker to patients if it can help improve quality of life, improve patient outcomes, and simultaneously reduce the cost of care. So that is kind of their global objective with this.

And what is nice is, I think we fit in perfectly with that because, from a technology point of view, we really offer the minimalist risk in terms of if the patient is on cells and they are not manipulated. So as they are risk-adjusting different technologies, we fall in that lowest, kind of lowest bar from a safety point of view case.

And we probably treated more patients in Japan than anywhere else in the world, and certainly more than any other company in the world. And so we are very visible there; many, many trials going on. And I think many of those could qualify for this new legislation, should it pass.

So the timeline is, as it stands today, the Diet was trying to get this approved before their summer break in June. They needed to make some additional changes to it. It is now on track to go for a vote in September and they are actively developing the legislation as well as the regulations and the infrastructure that needs to couple with that and we are expecting that -- I think it's September 21 that their decision will come out.

From everything we are hearing and the tom-toms in Japan, that legislation is fully supported in the Diet and we will move forward. But it is yet to be seen.

The second question, then, is, will Cytori's technology be one of the chosen that are on this select list. And I think that there is no guarantee, but as we are involved as much as we can be and the advisors that we have that are involved in this, and the visibility that we have within Japan -- and I mean that in an academic sense, that most of the major academic centers in Japan either know Cytori or work with Cytori at some level.

And so we have a lot of support from the clinicians who are treating patients and seeing these clinical issues every day. And so I think that is helping to support the Cytori technology for this legislation. But we are very excited about it.

And we think that if the decision comes through in September, that it's approved and, if we are on the list, there will be a time that that incubates and it probably becomes active sometime next year. But it's potentially game-changing, and hopefully a beacon to regulatory agencies around the world to find ways to risk-adjust various genitive medicine approaches and fast-track them to get this technology to the patients who need it the most.

So, importantly for our year this year, though, we have reconfirmed our guidance with the exception of the asset that we sold off. None of our current revenue forecasts are depending on this legislation. This really represents significant upside in growth going into next year.

Well, thank you for that answer. It's a very interesting development. And just a brief follow-up question to that. Are there specific treatment indications that you are not only involved in, but also may just have a lot more support to get onto the list?

The way I understand it is that it is going to be more technology based on the list than it will be indications on the list. Now, that could change. They may put a priority around life-saving or maybe what they consider either expensive or unmet medical needs indications. So, yet to be seen how that is going to work.

But, as I understand it right now, it's going to be more technology-based that this sort of approved list of companies or technologies that would be able to fast-track. And maybe when they are executing the fast-track authorizations they will look at that in some kind of a priority. So I would expect that, but it hasn't been disclosed as far as I know.

Okay. Thanks for the clarification.

You know, just to follow-up one bit more, the trials we have going on in Japan that are investigator led trials, really cover some of the most important and devastating diseases there. There is a limb ischemia trial; there is an incontinence trial which affects half the women that are over 40 in Japan. There is a cardiac heart failure trial. There is a liver ischemia trial. There's a wound trials and radiation trials, breast reconstruction after cancer.

So there's a number of things that I think not only are unmet needs that could have huge quality of life impact, that I think we can very clearly show tremendous economic advantage.

Okay. Thanks.

Dan Trent, Stonegate Securities.

Thanks for taking my call. I am wondering, regarding the recent approval for Celution in Australia, can you provide some color on size of that opportunity and how you're going to allocate resources there?

Yes. Hi. This is Clyde Shores. So I think what this means for all our stakeholders is that the Celution system approved now by TGA and included in the Australian Registry of Therapeutic Goods, or ARTG, really follows a nearly two-year review of our data supporting the approval and enables us to have market access and freedom to import without special dispensation from the TGA.

As you may know, under the APA, or the Authorized Prescriber Approval process, Celution System has been used with more than 80 cases with some of our investigators there, where the surgeon would obtain this APA from the TGA under the special access scheme. And that was for each type of each patient that they needed to treat.

But now, with the full approval, it really allows us to open up the broader market, enable us to continue to sell there directly, engage distributors to go, as Chris said, to now private -- initially private hospitals and clinics, establish these investigator-led and Cytori-driven studies that would then get us data to ultimately get therapeutic approvals and reimbursement, so that patients who are in the public system can also benefit from the therapies.

That's really -- we see it as a nice opportunity, a population of 22 million people, certainly an important market for us. We are well-positioned there. And now, with the approval, we think we can accelerate adoption in getting therapies to patients.

Okay. And a follow-up question regarding the ATHENA 2 trials. For one, I understand you are -- when you enroll a new patient for the ATHENA 1 trial, it is somewhat of a lengthy process, hence the delay in finishing that. Wondering how that ATHENA 2 is just going to be able to segue on just going to be able to piggyback onto ATHENA 1, be it that it is a higher dosage, wonder if you could provide some color there.

Before Marc jumps in, it's Chris. From what I have seen at the heart failure trials, the average enrollment rate is something below one patient per month per center. I think the average is closer to 0.7 patients per month per center. So we are actually tracking from an active site enrollment rate higher than kind of the standard enrollment for a trial of this type.

What's kind of caused the delay in the total enrollment has really been -- effectively really had two centers up and running over the last -- the majority of the time of the study so far. And it has been challenging to get centers up for a number of reasons. We have had a couple of sites that had their own independent issues. It is a complex trial.

So -- but I think that now these centers are all up and running, what we go into ATHENA 2, as Marc described, it might be marginally more tissue harvest, but it is not -- from a clinical point of view, that is a non-event. And then everything else is effectively the same. How they deliberate, the volumes they deliver, if the cells are just more concentrated.

So I think executing the trial will be quite efficient. The majority of centers will be already up and running, have equipment installed, IRBs, budgets in place. So we don't have to reinvent the wheel on all of those things, which is really what has taken the lion's share of the effort and the time.

Okay. Thank you.

(Operator Instructions) Jason Kolbert, Maxim.

I would like to switch gears with you guys and talk just a little bit about the numbers. We had talked, I know, last quarter about back end strength. Can you go over with me, what is going to drive the back end revenue strength? And are you still reiterating guidance for 2013? And just remind me what you think the top line guidance is.

Hi, Jason. It's Clyde. Yes, I think as we have guided, we see a majority of the growth coming in the second half of the year. The focus will remain the same with the top priority in sales coming from Japan and the class I sales following that regulatory approval we had last September. We have continued to expand our countrywide distribution network there and training these distributors and then helping them with the pull-through at the hospitals.

So that's been ongoing for the latter part of last year and certainly well into this year. And that is why we'll see a lot of that pull-through in sales, coming through in the second half.

In Europe, as we talked about before we received the interface approval and that has allowed us to begin our controlled launch into key centers where we can introduce the intravascular indications, get sites up and running on chronic heart failure, investigator-initiated studies, and we will leverage the ADVANCE sites that we have been working with throughout Europe and the resources that we have there.

And then we will just continue as we have opportunistically around the world in driving these trends translational research studies, and taking advantage of where we have had geographic expansion with new approvals that we had last year in quite a few quandaries and countries and now with Australia and New Zealand.

And can you help me understand that, as you are placing systems around the globe, and at the same time pursuing a therapeutic indication, how do you stop people from just using the system and not doing the therapy themselves? Is it that they are going to need a specialized kit and they are going to end up paying for the kit?

Because it seems to me there is going to be a gap between the cost involved in making us cell product today on a unit that you sell, let's say, in Australia versus the price that you would like to charge for a therapeutic products that someone is going to make driven by, we'll call it a Cytori set of disposables that will go in an existing unit. Aren't people going to be motivated to try to figure out if they can just make it themselves and not -- avoid that price? It's a little bit of like a conflicting business model to some extent.

Jason, maybe I will jump in. I think you know our overall approach. There is really two different cartridges that provide two different outputs. One is for vascular use and that will be the more expensive cartridge. And, more expensive, we are talking $5000 to $10,000.

On the tissue side, then that is more in the $2000 to $3000 per treatment. And, ideally, with the Celution next-generation system we are working on, we will bring those costs down even more. So comparably, I think these are relatively inexpensive.

But the strategy is that, as we add therapeutic claims -- specific therapeutic claims that are based on trial data, attach reimbursement to that and so forth, that the majority of the market will use that (technical difficulty) product, because I think the risks of a homebrew or people trying to do this in a back room without understanding everything that we have in our $400 million investment, I think it's too much of a risk.

And for reimbursement and all those things in place, you will see ultimately that -- and this is history repeating itself over and over. Technology that has been vetted by the regulatory authorities, that has approval and gets reimbursement, really does dominate the space. Would you rather have the drug that has been validated and proved safe and effective, or one that you are buying in a foreign country that you don't know where it came from or what it could do? So that's kind of the idea here.

Will there be people that want to do their own thing and homebrew it, or a doctor that is a tinkerer that makes it in his own office and lab? Absolutely. That's not the market. The main market -- they are in the business of treating patients and their time is what's valuable, and I think we make that efficient and we are going to make it affordable to use ourselves.

So I think from a strategic point of view, we really are putting all the elements together to make this the safest, proven reimbursed product that is going to dominate the market.

Thanks, Chris. And one last question. And I just want to hone in on this. BARDA, there are three steps; you've done a beautiful job of outlining what those three steps are.

Once you hit those three steps and BARDA accepts that you got a viable preclinical model; you've got system validation; you've got cell viability, how does that $56 million payment, which is, admittedly, a transformative amount of money for Cytori -- how does that get released?

Is that, then, processed on time and materials or through a clinical trial or do you get a lump sum? Help us understand what that news release -- what that announcement might look like a year from now or maybe even sooner.

Yes. So I think about you are exactly right on the process. We go through this special meeting that I talked about in the script. It's called in-process review meeting. We are scheduling that for Q1. And we are on track for that.

And once they have agreed that we hit those milestones and it opens up that next milestone, they are going to re-d look at the budget. We think that we are going to be within that $56 million-plus-minus a little bit range. But, typically, I think they hold pretty firm. So it's no guarantee, but that's our expectation.

That $56 million is really intended to fund clinical trials and research that will probably go over a two- to three-year period -- more like probably three years. And similar to the $4.7 million in the proof of concept phase, we will bill against that for people and trials and costs and research and all of the things that we are doing.

So it won't come as a check upfront, unfortunately. We would love that. But I think rather we will see it in quarterly contract revenues, similar to what we are doing now. And you could kind of line that over a three-year period just to get an idea. So probably, if you are kind of budgeting $17 million to $20 million a year, that is probably a reasonable expectation of that coming through.

And the other thing that is I think important from that is, one, we believe that BARDA has already earmarked the next year's tranche in the budget that is coming up. Their fiscal year starts in October, and we understand that we are already programmed into that budget on the expectation that we are going to achieve the milestones and move into that phase.

And, secondly, designed into that overall resource, is overhead and existing employees and things that we are already doing. So I think there is an efficiency of that money that it doesn't just pass through and fund external costs, but that we get some internal benefit from that that can take down the burn on overhead and other things.

So I think it's a tremendous opportunity and we feel like we are really on track to hit this, and that everything is lined up to move into that second phase.

Thanks, Chris. I really appreciate it, and I look forward to hearing more from you and also congratulations to Dr. Keston and hearing more about how the trial is progressing as we move deeper into the next quarter. Thanks.

Thanks, Jason.

Keith Singer, Keith Singer Wealth Management.

Hey, Chris. Just a follow-up on that question regarding the BARDA costs. Can you sort of guesstimate how much additional cost you are going to incur in order to get that $56 million? Is it $40 million, $50 million?

You know, that's a good question for Mark Saad. He knows more of the details on that. I'll let him describe it.

Thanks, Keith. So when you look at the $4.7 million in the existing contract for which we are now billing under and performing services under, that specifically funds direct costs that Cytori is paying, some of which are incurred through existing employees, existing resources that were already here, perhaps doing other things, but we have repurposed them to do the BARDA contract.

So those are funding those things, plus the attributable overhead allowances and fringe benefits of things like that. Plus, external costs -- those typically are things like external study costs that we would not have otherwise got into if for not the fact that we were awarded this contract.

And then, finally, there is a profit margin that is negotiated. And from a GAAP perspective, that product margin profit is typically pretty small -- south of 10% -- in which case, similar to this case.

So if you look specifically at the part of the contract that was awarded, about $4.7 million, it is net profitable to us, both on a GAAP and a cash basis. It is more profitable on a cash basis because, like I said, a number of those direct costs are things that our existing resources are doing that we assigned to BARDA appropriately, that previously were working on other things. So the result, our cost structure, as an organization, benefits from this contract fairly meaningfully, and I think a fairly sizable amount of that $4.7 million above the GAAP profit margin is actually a cash positive.

So your question of how many more millions of dollars do you need to spend to be eligible to be awarded for the next phase, it's a number that is within that $4.7 million, all-in. And, effectively, it's either people that we already have here that are working on the milestones two and three within the objectives, and then particularly on an external cost, what are those preclinical studies that are being managed outside Cytori that are truly external costs. All of that is within the $4.7 million, like I said.

So we are dealing with the fact that I think we have had $1.4 million this year of realized contract revenue. We had a few hundred thousand last year. So that would imply we are about a third of the way through from a revenue point of view and that all directly relates to costs incurred.

So, to be as specific as I can, I would estimate we would have another couple million dollars of contract revenue, of which a part of that are actual external costs incurred. Is that clear enough?

Thank you. This concludes the Q&A session for today's call. I would now like to turn the floor back over to Chris Calhoun for any closing remarks.

For more than a decade, there has 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.

With validation and support of hospitals and governments, Cytori's technology is at the epicenter of innovation in this emerging new field of medicine. As a Company, we are expanding our market access, sharpening our focus, and more efficiently use capital and driving to a profitable revenue growth. Thank you for your interest and support for our Company and for our mission.

This does conclude today's teleconference. Please disconnect your line at this time and have a wonderful evening.