Plus Therapeutics Inc (PSTV) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Cytori Therapeutics fourth-quarter 2013 earnings results call.

(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.

Thank you. Good afternoon, and welcome to our year-end 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 Sales and Marketing.

2013 was a year of progress and focus for Cytori, consistent with our four principal objectives established for the year. First, we spent considerable time and effort laying the foundation for a successful US clinical trial program in heart failure, including optimizing the ATHENA and ATHENA II trials. Second, we achieved all three of the proof-of-concept BARDA contract milestones on budget and ahead of schedule.

Third, we continued to generate increasing demand for our products and services. And fourth, we strengthened our cash position and balance sheet, bringing in approximately $35 million without going to the capital markets on Wall Street, including establishing a strategic partnership with Lorem Vascular, valued up to $531 million.

Total product and contract revenues increased 14% in 2013 to $10.4 million. Product revenue was under our forecast at $7.1 million, a decline of $1.6 million compared to 2012. Contract revenue was slightly ahead of our forecast at $3.3 million for the year. An additional $3.6 million in product demand was filled before the end of the year, but the revenue has been deferred into 2014 based on a revision to our revenue recognition policy.

Additionally, we continued to strengthen our intellectual property position. We are going into our sixth year of averaging at least one new issued patent per month. We obtained 12 new patents in 2013, have 65 issued patents to date, and more than 85 applications pending worldwide related to current and future-generation ADRC-based therapeutic uses, methods, and devices.

We in-licensed rights to two patents related to our sports medicine and autoimmune disease platforms. And two additional patents have been allowed: one related to our orthopedic platform, and another related to our wound-healing platform and BARDA.

2014 is on track to be our most important year to date, with five impactful milestones that we expect to achieve, each of which we believe are fundamental in unlocking the value of our technology. These include: completion of the ATHENA clinical trial enrollment; publication of long-term data from our PRECISE clinical trial; expansion of the BARDA contract, and funding a US clinical trial in burn repair; to increase product and contract revenue; and to achieve approval in China for this Celution System.

Before we move into the Q&A, I'd like to take a few minutes to discuss each of these items in more detail. Let's start with our cardiovascular pipeline. The key value driver for our cardiovascular program is the completion of enrollment in our ATHENA pilot Phase II-B trials and subsequent evaluation of the trial data. Demonstrating continued safety and a clear signal of efficacy in treated patients, we believe, will provide a clear path to a US FDA approval trial, and ultimately, marketing approval and reimbursement.

The ATHENA trial program, which is the first of its kind in the US, includes two double-blind placebo-controlled trials for patients with chronic refractory ischemic heart failure. The ATHENA and ATHENA II trials will each include 45 patients, with 30 randomized to ADRC therapy, and 15 to receive placebo control. ATHENA is treating patients with the same cell dose that was delivered in the PRECISE trial, and ATHENA II will treat patients with double the ATHENA dose.

While we initially intended to complete enrollment in ATHENA last year, we submitted protocol changes to the FDA and each of the institutional review boards regarding the ATHENA trial, which essentially paused the trial until all of the amendments had been approved. These important changes were designed to harmonize the ATHENA and ATHENA II trials, optimize the inclusion and exclusion criteria to help facilitate enrollment, while not sacrificing quality or safety of the trial, and also to ensure that these trials are designed to achieve the end points that will allow us to rapidly move directly into a US approval trial.

As of February 2014, and for the first time since the trial was initiated, all eight ATHENA clinical sites are actively screening patients. The 23rd patient was treated last week, and there are several more patients scheduled for treatment this month, including one tomorrow. A leading indicator for enrollment is the number of patients in pre-screening or screening, which is now at a record level with 18 patients at seven ATHENA sites.

Despite the challenges in initiating our first US clinical trial, all sites are now active, and momentum is building. Based on our current enrollment rate and leading indicators, enrollment for ATHENA is tracking toward completion during the second or third quarter. The FDA has allowed two more sites in ATHENA II than the ATHENA trial, so while we are maximizing our focus on getting ATHENA enrolled first, we can simultaneously initiate ATHENA II in parallel.

The first ATHENA II site is now active, and the first ATHENA II patient is being treated right now, and the second patient is scheduled to be treated tomorrow. Once the ATHENA trial is complete, the active centers will immediately transition enrollment into ATHENA II to maintain the momentum, and accelerate enrollment in ATHENA II. Depending on the enrollment rate for ATHENA, we anticipate the ATHENA II trial would be fully enrolled around the end of the year or first quarter next year.

Looking forward, the ATHENA program has been designed and updated to optimize our path to an approval trial and, ultimately, market approval and reimbursement. In the fourth quarter of 2013, our management team, along with select clinical investigators from the ATHENA trial, met with the FDA to discuss the path forward and allowable pivotal trial end points. While no final decision has been made at this early point, the FDA indicated that it may be amenable to an approval trial design based on functional and quality-of-life end points. Based on that guidance, the size, risk, time frame, and cost of our US pivotal trial would all be reduced considerably compared to a mortality- and re-hospitalization-based trial.

We have previously completed the PRECISE trial, a double-blind placebo-controlled multi-center trial in European patients with chronic ischemic heart failure. As previously reported at major cardiovascular symposia, the PRECISE trial demonstrated statistically significant improvement in exercise capacity over placebo, a clinically relevant end point. The long-term follow-up data from this trial is in the final stages of peer review, and publication is anticipated this year. Our US ATHENA trial program is predominantly based on this safety and feasibility trial.

Now let's turn to BARDA. A core priority in 2013 was completing the three deliverables for our BARDA contract, and that was accomplished on budget and ahead of schedule. Our BARDA contract awarded in the Fall of 2012 may provide 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 the effects of an attack with an improvised nuclear device. In this scenario, the nation's trauma system could be overwhelmed with patients with a combined injury, including radiation exposure and thermal burns.

The key benefit to this contract to Cytori, if all options are exercised, are that, one, it provides a fully funded commercial path to a market that includes the world's largest customer, the US government. Second, it supports the funding [of] development of our next-generation Celution System. Third, it provides at least one path through FDA for a meaningful clinical application in skin and soft tissue repair.

In addition, 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 commercialize its cell therapy 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 that could trigger up to $56 million in subsequent contract options. These three objectives are: one, to validate feasibility of a next-generation system; two, to demonstrate that Cytori's cell therapeutic population can be obtained from patients with a severe burn injury; and three, to show efficacy of Cytori's cell therapy products in a novel, pre-clinical model of thermal burn, with a concomitant radiation exposure.

Cytori believes that it completed all three objectives in 2013. We are actively working with our counterparts at BARDA to schedule an in-process review meeting with the authority's leadership group to review the achievements and the data, and determine the next steps. It is our expectation that the decision will be to expand the guaranteed portion of the contract to include one or more options related to further product and clinical development towards the end goal.

To enable this meeting to be scheduled in the second quarter, the Cytori team and BARDA have a scheduled meeting this month with the FDA to discuss the clinical trial plan for thermal burns. With the FDA's clinical guidance and the strong proof-of-concept data from Cytori, we believe BARDA will have the information necessary to proceed.

I would like to spend a few minutes now explaining our newly-announced efforts in sports medicine and orthopedics. In January, Cytori announced that we had received investigational device exemption approval from the FDA to begin a prospective clinical trial to evaluate the safety and feasibility of Cytori's cell therapy as a potential treatment for hamstring injuries.

The trial, referred to as RECOVER, has begun as a 10-patient open-label study in 2014 at two sites: the Department of Orthopaedic Surgery, University of Texas Health Medical School at Houston, and IRONMAN Sports Medicine Institute at Memoriam (sic - see memorialhermann.org, "Memorial Hermann") Hermann Hospital, and at the Kerlan-Jobe Orthopaedic Clinic in Los Angeles.

Following a 90-patient assessment of the first 10 patients, Cytori is approved by the FDA to expand RECOVER to a multi-dose, multi-center, double-blind placebo-controlled trial. The timeline to complete the first phase of the study will be provided once the trial is initiated and Cytori is able to forecast enrollment.

We have been studying ADRCs in acute and chronic muscle injury in the heart for more than a decade, and Cytori cell therapy is thought to play a role in improving perfusion and reducing inflammation in damaged cardiac muscle. Similarly, we believe ADRCs could support healing in injured skeletal muscles, such as that of a hamstring injury.

Initially, RECOVER involves a minimal incremental investment for the first 10 patients. If successful, RECOVER may provide an accelerated path to market in the US, targeting the millions of recreational and professional sports injuries that occur each year.

Globally, Cytori is building a cell therapy sports medicine business. Beyond the RECOVER trial, for several years the Company has supported multiple ongoing investigator-initiated pilot studies involving professional and amateur athletes with acute and chronic muscle injuries and ACL reconstruction.

We are encouraged by the preliminary data from these pilots, and as a result, we have initiated two multi-center registries for sports-related indications in countries where Celution System is available for commercial use. The ACHILLES Registry will collect data from patients with muscle and ligament injuries treated with Cytori cell therapy, and the RELIEVE Registry will collect data from patients with osteoarthritis. Both registries will collect patient data, and may support future regulatory and reimbursement efforts.

Specifically, powerful stem and regenerative cells that can be obtained from the patient's own fat tissue and delivered to the site of injury has been shown to facilitate and accelerate the healing process in muscles, tendons, ligaments, and bones. Time to treatment is important, but these cells help reduce inflammation, prevent injured and at-risk cells from dying, increase blood flow, accelerate healing, and essentially tilt the balance away from scar, and toward regeneration.

This technology also applies to chronic conditions, including prior knee, muscle, cartilage, and bone injury, and damage in retired athletes, as well as the much bigger sports medicine applications common with the aging baby-boomer generation. This market is estimated to be the largest market for the emerging cell therapy field, exceeding even cardiovascular disease, due to the extremely high prevalence of sports-related injury and chronic morbidity associated with osteoarthritis.

Now let's discuss our commercial business. Cytori's commercial business today is focused on offering systems and consumables primarily to academic research institutions and clinicians performing their own investigator-initiated studies or clinical series. We estimate there are now more than 50 investigator-initiated studies either completed, in planning, or in progress.

While these studies represent modest product revenue, these studies are of strategic importance in that they may identify potential new therapeutic applications for Cytori cell therapy. These studies generate valuable clinical data that we may be able to leverage in multiple ways, including supporting regulatory approvals, expanding our commercial business, procuring government contracts, and facilitating new partnerships.

Additionally, these studies create awareness and familiarity among physicians, many of whom are thought leaders and influencers in their respective medical disciplines. This opportunity in the cell therapy field for Cytori is enabled by our device-based business model, availability of our products with a growing regulatory approval base that now includes 40 countries, and affordable products that allow safe and rapid access to their patient's own regenerative cells. In this early phase of commercialization, we are establishing Cytori's brand, and creating a commercial footprint including distribution, technical support and service, training, medical education, and local centers of excellence.

In parallel, we are advancing our therapeutic pipeline that targets disease-specific indications. Once the Celution System achieves reimbursement for a specific indication, we will increase our commercial investment for full launch, and focus towards rapidly growing device utilization that will increase the lucrative consumable revenue stream.

Additionally, we have augmented our product revenue with contract revenue from BARDA. While we do not know today if the contract will advance into the next larger phases, we believe that we have successfully accomplished all of the initial milestones on budget and ahead of schedule.

Now, entering 2014, we are positioned to continue to grow our commercial business. We are well positioned in Japan to capitalize on its recent new legislation intended to create an accelerated, risk-adjusted path to market for cell therapies. We've expanded into new markets, including Singapore and Australia, where we intend to grow these new markets with our partner, Lorem Vascular, who is ramping up its commercial organization while we work together toward market approval in China. And in Europe, our 2013 Intravase approval, coupled with our broad CE Mark approvals for the Celution System, permit on-label sales of our technology for safe, intravascular use and for tissue ischemia.

Let's discuss our financial performance. Total product and contract revenues increased 14% for the full-year 2013 to $10.4 million. This includes $7.1 million in product revenue and $3.3 million in contract revenue. While product revenue declined year over year by $1.6 million, real demand for the product continues, as an additional $3.6 million in orders was received, and products shipped during the 2013 that are expected to be recognized as revenue in 2014 due to a change in our revenue recognition policies according to US GAAP.

The majority of these revenues are for sales in Japan, where, in certain circumstances, we will defer revenue recognition until the time of payment. Contract revenues increased by $2.9 million over the prior year. Our net loss for the full year decreased by 20% to $26.2 million, or $0.39 per share, in 2013 compared to $32.3 million, or $0.55 per share, in 2012.

Cytori ended 2013 with $19.7 million of cash, equivalents, and accounts receivables. Subsequent to the end of the year, Cytori received the final $9 million from the completion of the equity sale as part of the license agreement with Lorem Vascular. Additionally, year over year, we reduced our short-term obligations by nearly $8 million.

Overall, we improved the Company's capital strength without going to the public equity markets, by bringing approximately $35 million through the Lorem partnership, Puregraft divestiture, and through the restructuring of our term loan. Going forward, we continue to evaluate strategic and/or financial market transactions to provide the necessary capital position to strengthen the Company and to accomplish our near- and long-term goals.

In closing, we are focused on delivering on our five principal objectives in 2014, which we believe will drive momentum, increasing shareholder value. These include: completion of the ATHENA clinical trial enrollment; publication of long-term data from our PRECISE clinical trial; expansion of the BARDA contract and funding for the US clinical trial in burn; increased product and contract revenues; and to achieve approval in China for the Celution System.

Jackie, I would like to take this opportunity to take any questions that the audience may have for me or my leadership team.

(Operator Instructions)

Our first question comes from the line of Steve Brozak with WBB Securities.

Good afternoon gentlemen. This -- how should I put this -- on budget and ahead of schedule is really always something you want to hear.

But can we go back and go over the specifics to what BARDA was looking for? And specifically, how and what you had to do, because obviously that is going to be critically important in having investors understand what the value proposition is of what you were able to accomplish. Can you start with the human study and what you had to do there?

Hello, Steve, it's Marc Hedrick. The three objectives that we had negotiated with BARDA to get through this first proof-of-concept stage of the contract were very clear and straightforward. The first one was showing that we could take a patient that has been burned and go into that burn tissue and remove the ADRC or stem cell fraction and have it basically be just as good as a non-burn patient. That was a key objective that we accomplished early on by looking at human tissue; that was a human study.

The second thing is, on the pre-clinical side, we basically had to go backwards because, remember, a lot of the things that help make BARDA enthusiastic about working with us are the reams of human data that we were able to bring to bear in breast reconstruction, radiation, and healing, and so forth. They asked us to go back, and in a more circumspect way, look at pre-clinical models -- particularly, pigs and other things and show that we could repeat in pre-clinical models what we did in patients.

And then finally, BARDA is thinking two or three steps down the road -- how are we going to scale this in the market and what are the -- in their terminology CONOPS. How are we going to get this technology throughout the US in all hospitals so that in the event of a disaster, it's pre-deployed and ready to work.

So they asked us to validate some key things on the next-generation system in terms of making it faster, more scalable, quicker, more cost-effective, and so forth. So those are the three things they asked us to do so. Those are the three objectives that we believe we hit and in really constant communications with them, we believe that they feel like we've hit those as well.

Okay and I have got a follow-up and I'll do it in reverse order. On the -- in terms of equipment, today's equipment and future equipment -- the equipment that you have right now is capable of doing everything that is required. But obviously people look for better, faster, easier-to-handle, and equipment that for all intents and purposes, you can easily transition into. Is that an accurate statement?

It is accurate. Current equipment can do everything we need to do, in terms of treating patients with the kinds of things that BARDA would anticipate needing to respond to.

Now with the current equipment -- obviously, one of the things that people look at is the ability to leverage, so it wouldn't be as if this equipment was just going to be put into mothballs and just prepositioned. This is something that, in theory, what you look at is to have clinicians and different facilities being able to use this for other indications, for other purposes, throughout the United States and obviously potentially throughout the world. Is that also an accurate statement?

That's true. Let me give you a little color, Steve. When going into this discussion with BARDA, I'd heard a lot about stockpiling and knew of several companies whose core relationship with BARDA was built around stockpiling big orders and then renewing that. BARDA felt burned because of that; it wasn't a great economic model for the government, particularly now, looking back on it, 10-plus years after 9/11.

What they're looking for is new, more innovative, more cost-effective models, by which they can partner with companies and get technology available for the public if they need it. What they like about ours is this warm deployment opportunity where we build it, we take it to market for a variety of things, it's pre-deployed, it's out there. They don't have to stockpile it, it's in the market, doctors are pre-trained, using it.

So when the worst happens, a switch can be flipped and immediately patients can go through a variety of different types of care facilities and be treated in a seamless way. They like that model. It makes total sense to us. Our technology is perfect for that and that's a lot of what's driving their interest.

Okay. Number two, in terms of -- give us an example of the clinical proofs, not the pre-clinical proofs that you just went through, but the clinical proofs that you had, had in your armamentarium, to give us examples of what they saw, what you had done previous. Because I don't -- obviously, the value proposition is that you have clinical data that basically says, okay, this is what you were able to do. Give us some examples of that?

It starts with, believe it or not, breast reconstruction. Most of the women that we treated in RESTORE I and RESTORE II -- the Japanese and European clinical trials and studies related to patients that have had radiation and partial mastectomy, was important data because that data to them showed that we could reverse the effects of radiation. There's really nothing, to my knowledge, out there that can reverse the effects of radiation to that degree. So that was compelling.

The second is that we -- based on the breast reconstruction data, we partnered several years ago with the Atomic Bomb Institute in Nagasaki and one of their key researchers there to take our technology and use it for wounds that, although very small market, but a very difficult-to-treat market -- patients that have had radiation for cancer, had open wounds, and were at risk of dying for sepsis. We showed that, not only when the skin was intact we could repair the burn tissue, that when the skin was open and there was an ulcer, in the context of radiation, we could heal that.

That was important data and there is several published clinical series supporting that. That was important.

Then finally, we have taken that beyond just radiation into wound healing in general and showed, anecdotally, and in some smaller clinical series, that it can help heal wounds that would otherwise not heal. You added all that up, you had a BARDA team that was very excited about the possibility.

Okay. That leaves us with the first item, which is the human study that you just went through, and obviously, it is a very difficult study. But give us examples of what you were -- and I don't obviously want to get into nauseating detail -- but if you can give us examples of what you had to do, what you found? And what may have been surprising in terms of the results, and after that I'll hop back into the queue? Thank you.

Just one clarification, Steve. What clinical study are you referring to?

I'm sorry, the human study that you just engaged in, in terms of the collection of samples? I apologize, it's the--?

No, I got you. We've developed research protocols with burn centers in our area who typically take care of medium to large burns. They get -- the typical treatment pattern for those patients is to remove the burn tissue and then do some sort of grafting procedure. That burn tissue that they typically throw away was the subject of the study.

We took the tissue -- took it through our process and showed that from the tissue, we could get viable cells that were perfectly useful and retained all their function. We did that in multiple patients and multiple samples around different areas of the body. That was one of the three key objectives that we accomplished in our proof-of-concept phase.

Great. Well obviously, this half of the year is going to be critically important, so I look forward to the next call that describes it. Thank you again and congratulations gentlemen.

Thank you.

Our next question comes from Jason Kolbert with Maxim.

Hi guys. Can we talk just a little bit about what happened in the fourth quarter because you had been guiding us to $7 million. And I understand that product revenue, while it fell on $3.6 million, will probably be recognized in the first quarter. What was that shortfall and how was performance in Japan?

Hello, Jason, it's Mark Saad. I'll address the revenue and shipment number.

Like you said, we were guiding towards sales to be higher and would have seen that happen if we had not made a change subsequent to our last call regarding the way in which we will book revenue. And that's based in observation of a number of cases that we've been tracking where, particularly when you're international -- just to give a quick perspective -- I think we're in a pretty unique situation as a US medical Company, where in many quarters, the vast majority of our sales come from Japan. That's a fairly unique situation.

So what we've done and have sought to do is to maximally align our sales contracts, et cetera, with traditional US GAAP. That's how we've embarked upon it and have managed the sales process and the accounting revenue recognition side of the equation.

Knowing that Japan is a very different marketplace in terms of culture, everything, and knowing that what we see today on a small scale may well only expand over time. We think there's a lot of near-term growth that's pretty come from Japan, particularly with these new regen med laws, and we are in a unique position, with a dedicated team there, to capitalize on that. It was really important for us to get this right and to make sure we are being maximally minimizing future risks in terms of where a customer could implicitly look at a contract different than the way the explicit language of a contract exists.

And so in looking at a number of cases where that could be the case, we took the step, following review of the quarter, to really put all new customers into a -- effectively a holding pattern, from a recognition point of view. Basically even if they met clean US GAAP contract terms, we would still put an additional filter of, okay, let's still defer to other things, particularly collections. But there is a number of things that we want to make sure are really final and not take revenue risk.

That was something that took place in the fourth-quarter review, based on, I'd say, a number of individual cases. Which really made it hard to know prospectively, in a given situation, even if the contracts were clean, would it be not better to take a more conservative approach overall. And so given our growth needs and growth objectives, particularly in Japan, we felt, in combination of talking with our auditors and committees, that, that was the right way to go. So we are putting in place a number of changes like that.

The outcome there, Jason, was that we had a fairly large number of sales, predominantly from Japan, as I identified in that number, that we did not take as revenue in 2013. But they were successfully shipped, received, and we would anticipate them being picked up this year. While that certainly is consistent with what you said in terms of not seeing it in the fourth quarter, we do think that the inherent demand for the product is there. And now we just want to make sure that we have aligned recognition practices in a way that best protect us going forward.

Mark, I totally understand, but does that mean that we should be adjusting our guidance for 2014 or should we make any change to that number, in other words? Or is this just a mouse going down a snake and we will just push everything out a quarter?

That's a good question Jason. In general, as we look at what our 2014 results will be, we recognize that you have this existing business, and yes, to the extent that have got this existing business that's predominately to researchers, you are going to have that extra mouse, as you call it, of revenues that's in there that will obviously enhance what we accomplished in 2014.

We will also have, based on this policy, I think a scenario where until we see individual customer experiences, particularly in Japan, cleanly go the route of where the customers are really following the US contracts the way we would need them to per US GAAP. Then you could safely say, well, we will probably embed a one- to two-quarter delay on when a shipment is made, particularly in Japan, and when we'll see the revenue. So it's partially true, Jason; at the same time, we could also infer an inherent lag of shipments in booking, particularly in Japan, for those customers. That's one fact I would point out.

The other fact is that, while the existing research business has been -- the nature of things, particularly given -- whether it's the reimbursement environment or the fact that the market access points to really get to a consumable business have not yet been fully put together such that it's really been the capital equipment sale phase, that we are seeking to then graduate from to the consumable phase, to predict exactly how the year will take out, given the large funnel of opportunity, but the inherent variability quarter-to-quarter. And the fact that we've got now this Lorem Vascular transaction with the China approval that could have in a magnitude on the revenues, as an example.

The Japan regulations, which could have a big impact, the implementation of that act, is the part that we are really trying to make sure we understand before we go out and say this is how fast our revenues are going to grow now because of these potentially sea-changing events. Instead of doing that, what we are saying is, we are going to keep growing demand for the product. We expect you will see modest growth on the baseline, consistent with that research business.

However, we do have identified inflection points, pivot points, based on defined events, such as the Lorem contract, such as the Japan regen med laws. All we are saying is we want to evaluate those, really make sure we are seeing them implement. And then come back to you with, okay, this is now how we think that's going to impact, based on experience rather than getting too far in front of those in how fast it is going to cause our revenues to grow.

So that's how I'd look at 2014. We should grow, but we know the quarter is going to be variable. And we are going to come back to you with -- as we Japan and China and anything else that really moves the needle in that way -- come back to you as we see those play out.

Okay. A couple of quick questions, which is -- I'd like to come back offline at another time and talk a little bit about the growth of Japan and China, because you're right, I could see those as being very pivotal event.

Can we just briefly touch on BARDA, which is, now that you've achieved the three objectives, there's a -- the next tranche in the contract would be $56 million. How would that be received -- as up-front cash? And does that get billed against time and materials or is that money that you can use as you see fit?

Hello, Jason it's Marc. The short answer is that the cash from the contract will go into a variety of buckets. One is it offsets current burn so there are current individuals and current projects in development and so forth that it would offset. And ultimately, the degree to which it does add any impact depends on what the ultimate negotiated next steps are with BARDA. But that's one area.

Second area is that it goes to outside contractors. In particular, if we have a -- hopefully a clinical trial that is supported through BARDA, then some of those dollars will go through directly to those potential clinical trial sites and our CROs and so forth that help manage that trial, with the profit margin to us.

The best dollar is the dollar that -- in terms of the contract -- it comes internally offsets our current costs, maybe marginally increases our research and development expense. But generally those increased R&D expenses are things that are strategic and important to us anyway. The not-as-important dollar is the dollar that goes to the outside contractor. Ultimately, you'll see a mix of both of those, and that degree of mix will depend on what the final negotiated next steps of the contact can be.

Okay terrific, Marc. Now that we switched Marc's -- the most exciting thing I heard in this call was the potential for a QOL end point or an end point that would not expand on -- or that would not be mortality-driven. We all understand that dramatically impacts the time and size of the trial.

Can you give us any more insight into that? Are we talking about something like Kansas City, [KC, CQ], questionnaire, or some composite end point? Help us understand where you are in that process and when you might expect to have that nailed down?

Sure. We are very excited about the direction of the discussions, and frankly, the direction of our two Phase II clinical trials in the US. We have recently had a very revealing discussion with the FDA. We have built a strong relationship with them. We have presented to them what we feel like is the ideal approach should our Phase II's have support going to the next phase, which we of course hope they will.

There a couple of different options. One is to go to a bigger, more -- mortality, MACE-oriented trial. Another one, as Chris mentioned, is to go to a more quality-of-life, composite functional end point. They seem open to both.

We happen to think that, given our precise data, and obviously the way the ATHENA trials have been constructed, there is a tremendous commercial opportunity in that group patients that have -- that mid-level of heart failure, where they are not in extremis, but they are significantly symptomatic. That's a population that we think we can target. And a quality-of-life-based end point plus or minus a treadmill test or some other measure of exercise capacity would serve those and we think potentially drive reimbursement and adoption.

So I think we're early. We don't want to get too far ahead of ourselves, but the first discussions with the FDA are positive. We need to continue to collect the data. We will continue the ongoing discussions with FDA -- it's a dialogue, not a single conversation -- and update you as we learn more.

Okay. My last question was just understanding where you're going with the RECOVER trial. Just help me understand how many patients have been -- has trial begun, how many patients have been enrolled? And is that something you might consider bringing to Japan through the fast track side of the regulations there?

It's hard to put RECOVER in context for what it is and what it isn't. It's basically a small exploratory feasibility trial of 10 patients with a pre-negotiated option that's effectively a Phase II-B, to exercise should we want to. Where at two sites, our plan is to enroll that first 10 as soon as we can, evaluate the data, and then make a decision about whether to move forward based on that. As Chris mentioned, it is going to be very difficult to handicap enrollment so our plan is to let -- when we get those 10 patients in -- and then guide towards what our next step might be.

The importance, beyond just the option is that it really does support feasibility in acute musculotendinous injuries. Which have implications throughout orthopedics and sports medicine and that idea is consistent with what we've seen, frankly, in our cardiovascular patient. The heart is a muscle that has tendinous components. We've seen repair in the acute and chronic sides in our APOLLO and PRECISE trial and so we think that is supported data.

We've also got sports medicine pilots in Europe and Australia. We think the data from the 10 patients will support and align with what we're doing outside of the US. Secondly, it' going to support what we're trying to commercially in Europe, potentially expanding our claims, which could have an important commercial impact in the near-term, given our good relationship with our notified body.

Then finally -- and less important, but important to mention -- is that data could support a future orthopedic sports medicine related IDE in the US. So I would look at it really with that lens and probably no more.

All right, terrific. Thank you so much and for, Mark Saad, I want you to know that everybody at Maxim is enjoying our favorite whiskey. Thanks, guys.

And next question comes from Yale Jen with Laidlaw and Company.

Thanks for taking the questions. A lot of our question have been answered so I just want to start with the BARDA contract. Given that you guys already spoke with FDA and -- spoke with FDA, is there any additional agency you need to speak with? And if everything goes smoothly, if I model that potentially decision to be made in the second quarter of this year, will that be something not far-fetched?

Hi, Yale. It's Marc Hedrick again. A little bit of context.

With respect to BARDA, we have weekly, sometimes even more often than weekly, twice a week conference calls with BARDA. On a weekly basis, we have non-BARDA-related individuals on that call from other agencies within the government, even outside of HHS, going into DOD and so forth.

There's a recognition beyond just BARDA that Cytori has a BARDA contract, that we're moving the process forward, intend to go into a greater stage of our contract. At DOD, FDA, and a variety of other agencies that sit at the decision-making table, we are not -- we won't be new to them. So when we get to the ultimate decision-making forum, they will be very aware of Cytori, our data, and then our joint plan at BARDA. And BARDA, in a way, is helping to shepherd us through a complex governmental process to try to achieve their own governmental ends.

Okay. So the things possibly would have -- possibly a government decision maybe in the first half of this year is a possibility?

Yes that's absolutely a possibility. We're really -- lot of -- a flurry of activity in Q2 related to that. And assuming things happen on schedule and they are not delays, which there certainly could be, a Q2 answer is very possible.

And in terms of ATHENA study, that -- for the first one, that you have treated 33 patients. So there's about 12 left to be recruited and treated. Given that timeline you mentioned that the possible completion of recruitment will be second or third quarter of this year -- would that timeline -- would that -- if I consider early 2015, you might have the top-line data, would that be something -- a possibility?

Let me just correct one thing that you said so that we're absolutely clear. We are at 23, not 33; I wish we were at 33. Hope to be at 33 soon enough.

Okay.

So we have a little bit more work to do. We are over half way there. Between Chris Calhoun, Steven Kesten, and myself, we've been out to every single clinical trial site in ATHENA I and ATHENA II -- a lot of enthusiasm out there for getting this trial enrolled. And people can see the finish line.

The course -- the key gaiting item is when do we finish enrollment. It could be middle of the year depending on what the enrollment assumptions are that one makes and are there any other issues that occur. So six-month data is going to be critical. It will take about eight months after we finalize enrollment to have that data available, the database unlocked and reviewed.

So yes, your timing is about right. It's going to be early next year before we get the data, but in the meantime we are going to continue to drive forward on ATHENA II, enroll those ATHENA I sites directly into ATHENA II. On a practical way, that's the way we keep the momentum going.

We changed the trial, as Chris mentioned. That was the tough, but right call, momentum is building, and we hope to get ATHENA I done and roll right into ATHENA II and then be prepared for the decision discussion about a Phase III.

Okay, great. And last question before I get back to queue is that in terms of the China approval process, the guidance is potentially toward the fourth quarter, end of this year. Should that be the case if Lorem has committed additional or about $7 million purchase. Is that something still hold? Also, do you have any comment in terms of the process right now -- in terms -- for the FDA approval?

Hi, it's Chris. We've just spent the last couple of weeks with the leadership team from Lorem who has been over here in the US meeting with cardiac centers and potential -- several of the Board members and other centers that they can learn from. They are getting that business up and running.

In addition, they did buy the product that was part of the contract in Q4 and that's really to sell into the current market -- Singapore and Australia and they are building up their commercial team to do that. There is an existing funnel that we already had in place for those markets that they will be pursuing. We should see some commercial activity generally over the year from the existing markets.

Now for opening up China, we are making a series of moves that will allow us to bring our device and get it approved into China, we think by the end of the year. Obviously, any time you're dealing with international regulatory authorities, it's hard to give an exact timeline, but we've mapped out a plan and a pathway on how we can get there. And we're pursuing that aggressively together with the team from Lorem.

Upon approval, it's their vision to bring 50 systems into 25 of the top cities within China. By bring, I mean they want to buy the systems and place them into the hospitals and then seed those hospitals with 10 or 20 or 30 consumables so that they can get going and then do all of the appropriate training and education to create well-prepared centers of excellence that get that clinical experience under their belt that they treat people safely. And they are sophisticated and then they can become training centers to spread it more actively across China. That's their model.

They are committed to investing and really building that market. The secret for China, as you probably well know, it is really a numbers game. We are talking about, from a population base and a need base, really one of the largest opportunities on the planet. So getting those systems out there, getting the teams trained, is their goal, and they don't want any barriers to do.

So yes, there is a committed order, once we get approval. It's in the $5 million range. And that really is to get these systems and deploy them across targeted cities around China. Then also seed them with a meaningful number of consumables so that they get trained and that they can treat essentially autonomously without a lot of oversight from the Company.

There is an active plan that's coming together and we are very, very excited about the relationship with Lorem. We finished off the equity investment, as you have seen, and this is -- the value beyond the equity relationship -- the partnership value, what we are going to see from Lorem is going to be important for the Company.

Okay great. Thanks a lot. I appreciate it.

Our next question comes from Keay Nakae with Ascendiant Capital.

Thank you. First question relates to the BARDA contract and your upcoming meeting with the FDA. In order to be able to move forward into the next phase of BARDA, what specifically do you need the FDA to agree to? Do they actually have to approve and IDE for your proposed indication for treating thermal burns or what exactly does the FDA have to sign off on before you can move forward?

No, the way our discussions with BARDA have gone that the key was the three objectives, which we've done, and then subsequently, they've asked us to at least have a preliminary discussion with FDA. The discussion itself becomes the gaiting item and that meeting is on the schedule.

Okay, thanks for that. And then, related to Lorem, what else can you tell us at this point about their infrastructure? What do they physically now have in place to begin selling your product?

It is Marc Hedrick. I'll take that.

The answer is they are beginning to build an infrastructure. As we discussed on the last call, they are a new company that has deep connections within the Chinese market, the FDA, medical device, big pharma, and so forth. They are very interested in building a distribution channel for us throughout China -- China gigantic market, as you know -- difficult and complex. They have the connections to be able to do that.

I would say, it's still very early and we are just a handful employees, but over subsequent quarters, our plan is to update you and let you know how that is progressing and how that is building. Right now the key is just move towards regulatory approval, which doesn't require a lot of infrastructure.

Have they shared with you a plan for how they're going to build that out in terms of hiring X number of people and having XYZ systems in place by such and such date? Do you have that visibility?

Yes. The discussions with Lorem went on for a good year leading up to the signing of the contract. During that time, a collectively agreed upon business plan was produced, but the key gaiting item is ultimately regulatory approval. It triggers a lot of the subsequent investment and ultimate commercial work, which is where a lot of the costs will go.

Okay Thanks for that. And then just finally back to the hamstring study. I know you are going to do the initial 10, but is there at least an idea of how many additional patients you would then look to be enrolling and evaluating?

Yes. The RECOVER trial that we have -- that the FDA has agreed to -- has 10 patients in, I'd call it, an A phase, which is a feasibility. In pharma speak, it's a roll-in safety study, a feasibility study, when we look at two doses in 5 patients. It won't tell us a lot, but it gets to that initial feasibility stage and accomplishes some of the goals that I mentioned before.

At our -- it's our decision whether to go into Part B, which is a 60-patient, double-blind placebo-controlled safety feasibility study looking at low/high dose compared to placebo, 20 patients in a trial. So that's been fully vetted and planned out, but we have the option to pursue it assuming the FDA would agree that we would do so.

Okay, thanks.

Thank you.

Our next question comes from Dan Trang with Stonegate Securities.

Thank you, guys. Actually, all my questions have been answered.

Okay. Thanks very much, Dan.

I would now like to turn the call back over to Chris for e-mail question.

Mark, do you have one?

Yes we do. We have received an e-mail question that came in, that probably is best for Marc Hedrick to answer.

The question from [Ray Zari] is that there have been many adipose-derived stem and regenerative cell therapy clinics opening up in the US in the last couple years, despite the fact they are likely operating in violation of FDA regulations related to that concept of, quote-unquote, minimal manipulation. Could you explain how Cytori's technology fits into this regulatory picture, how this might play out, when it might represent an opportunity for the Company?

Ray, thanks for the question. First, let me just mention what Cytori's position in history is over the last 10 years and this comes from an awful lot of back and forth with the agencies. Solution, it's consumable, Celase, Itravase, the ADRC output -- they are all regulated as a device by CDRH.

That was a -- came as a result of a lot of discussion and negotiation. Ultimately, it was a decision made outside of CDRH, at the OM-budgement level through a process called request for designation.

We're clearly a device, regulated as a device and the therapy is regulated as a device. As for other approaches such as cell culture, taking out adipose tissue from a patient and applying any other quote-unquote manufacturing or manipulating the tissue or cells, whatever. That's really -- seems to be increasingly directed by FDA and CDRH the BLA or drug path -- biologic path. That has a very different timeline and regulatory path and deliverables and so forth than the device path has.

Implied in your question -- and I can't answer -- is that we are not really privy to what the FDA's strategy is relative to other companies and how they might employ some enforcement strategy on clinics that might be doing a home brew thing. We don't know. I can tell you that over the last two or three years, I've seen redacted letters to clinicians by the FDA implying as much, that they would be regulated under the BLA and ask -- as a biologic and that they should submit a biologics application.

When you take all this together, it's self-serving, but it validates our path and a lot of the hard work that we have been doing with FDA over the last 10 years to get that anchor as a device, not a biologic. In contrast to pretty much every other group where they are a biologic. There is some cell culture or something, as you mentioned, beyond the minimal manipulation. It's a competitive advantage for us, and because of where we are with FDA in some of our trials and so forth, our path is clear and it's a relatively direct way to the market.

At this time we have no further questions. I'd like to turn the floor back over to Chris Calhoun for any additional or closing remarks.

Great. Thank you very much.

I wanted to thank everybody for your time, interest, and support of Cytori in our important mission to innovate and market Cytori's cell therapy products that we believe will improve the lives of millions of patients around the world. Thank you very much.

Thank you. This concludes today's conference call. You may now disconnect.