Vericel Corp (VCEL) 2006 Q2 法說會逐字稿

Welcome to Aastrom Biosciences' investor conference call.

This morning, you'll hear brief remarks from Aastrom's executive management about the Company's recent progress and future goals. The balance of the call will focus on the question-and-answer session.

I'd now like to introduce Dr. Douglas Armstrong, Aastrom's CEO and Chairman, and Mr. Gerald Brennan, Aastrom's Vice President, Administrative and Financial Operations, and CFO.

I'll turn it over to Aastrom's CEO, Gerry Brennan.

Thank you, [Claudia].

I want to thank everyone on the call for taking the time to join us this morning. Before we begin, I'd like to review Aastrom's Safe Harbor Statement.

This conference call and webcast contains forward-looking statements including, without limitation, statements concerning product development, objectives, and anticipated timing; clinical trial initiation, completion, results, and anticipated timing; revenue results; potential market opportunities; market development plans; anticipated key milestones; and potential advantages and applications of the tissue repair cells and the AastromReplicell cell system, which involve certain risks and uncertainties.

These and other significant factors are discussed in greater detail in Aastrom's annual report on form 10K and other filings with the Securities and Exchange Commission. Actual results may differ significantly from the expectations contained in these forward-looking statements.

Now, it's my pleasure to turn this morning's call over to Dr. Doug Armstrong, our CEO and Chairman.

Doug?

Thank you, Gerry, and good morning to our listeners. We appreciate your joining the call today.

During the second quarter, we continued the positive momentum we established at the beginning of fiscal year 2006, with progress in the clinic and strengthened operations. This morning, I will review the recent progress in our clinical programs, provide some comments on the stem cell industry, then I'll discuss with you some of our organizational changes, specifically, the recent addition to our Board of Directors and the previously announced management succession plan. Then, I'll turn this back over to Gerry to go over, in a little more detail, our financial results.

Let me start with our clinical development progress.

Aastrom is capturing the therapeutic potential of bone marrow stem cells, which have powerful tissue regeneration capabilities in the form of our tissue repair cells, or TRCs. The best way to demonstrate progress towards this objective is to be active in the clinic in treating patients with our TRCs.

I can report to you that we are very pleased with the progress that is coming from our clinical program, progress that is measurable with the milestone events such as those achieved in the past quarter and the past year. In short, we have enabled to effectively work with the regulatory agencies in the United States and Europe to initiate our desired clinical trials, and we have been moving materially forward in each of our targeted clinical indications. The result is an increasing flow of clinical results and data to establish the tissue regeneration ability of our tissue repair cells as a new treatment approach.

The primary objective of our clinical trials -- of our current clinical trials -- is to demonstrate the ability of TRCs to safely form tissue in the human body as well as to establish the effect of TRCs on specific types of human tissue. Initially, we are focused on bone and vascular tissue regeneration.

In the bone area, we are engaged in proof-of-concept clinical trials, to evaluate TRCs induction of the formation of the three types of bone -- long bones, such as in the arms and legs; head or facial bone; and finally, spine bone. Our first trials are evaluating the safety and use of TRCs to repair severe non-union fractures of long bones that had failed previously to respond to a standard-of-care treatment.

As most of you are probably aware, we have announced very encouraging positive interim results from our pilot study in Spain, reporting helium responses in the six severe fractures treated with TRCs. In Spain, we have now received approval from the regulatory authorities for an additional trial to expand this clinical treatment and obtain an additional database of results. This trial is now under way.

Our related US clinical trial continues to actively enroll patients in multiple clinical centers. We have completed the treatment of the first 20 patients on schedule, and this trial has been expanded to an additional 16 patients, intended to allow approximately 25 patients that have been treated in an identical approach with the same level of data collection and analysis. The results collected from these 25 patients should be better suited for future publication and regulatory submissions. We are on-track to report interim results from this trial in the coming months.

In late-December, we announced the first results from our feasibility clinical trial conducted in Spain to evaluate the use of TRCs for maxillary, or upper jaw bone, reconstruction in five [indentureless] patients. All of the primary outcomes described by the trial protocol were successfully achieved in this trial.

The study results showed clinical safety and that the TRC treatment sites all exhibited bone growth that was statistically significant, and the new bone had the desired initial integration with pre-existing bone. There was also an improved statistical difference in the height and quality of the resulting bone compared with the concurrent internal control treatment. Also, an interesting reduction in the post-operative bruising and swelling was observed compared to the standard-of-care treatment. We're very pleased with the outcome of this study.

With positive results from the long bone and jaw bone trials in hand, we are now working to complete the proof-of-concept bone formation objective with the clinical trial using TRCs to generate spine bone. Spine fusion is one of the largest bone graph markets and demonstrating the effectiveness of TRC's spine confusion is an important component in our bone graph market development plan.

During the second quarter, we received the approval from the FDA of our IND for the clinical use of TRCs in spine fusion. This phase 1 and phase 2 level human trial will initially be conducted as single clinical center at the William Beaumont Hospital here in Michigan. We're planning to treat approximately five patients to obtain safety and use information and will then look to expand the trial to additional patients and additional clinical trial sites. The primary purpose of this approved clinical trial is to confirm that our TRC product, when used as a bone graph, is safe for use in posterior lateral lumbar spinal fusion surgery and is able to generate new bone at the fusion site based on defined radiographic and clinical data.

We are also now preparing for a spine fusion clinical trial in the European union, and we'll announce the details of this study at a later date once the study plan is completed.

The clinical trials I've discussed should produce multiple announcements in the coming year regarding the use of TRCs in the healing and regeneration of bone-in patients. We expect to use this clinical data and information to help determine which pivotal trial should be pursued in the bone-graph area.

With the increased clinical experience utilizing our TRCs in patients, and with the encouraging results that are being reported for bone repair and regeneration, we are better able to target various unmet medical needs that these cells may best address. An example is osteonecrosis, a medical disease that leads to total hip replacement.

Osteonecrosis, which is sometimes called avascular necrosis, or ADN, is a degenerative bone and vascular disease, which has lacked an effective therapeutic treatment. One location where osteonecrosis is a particular problem is in the upper head of the femur, this is the large bone that attaches to your hip. Osteonecrosis, in this area, typically leads to pain, immobility, and ultimately, to a total hip replacement. An ideal treatment for this problem would appear to require the regeneration of bone, bone marrow, and vascular tissues.

TRCs may offer unique product technology with potential to meet these multi-tissue generation criteria. We have also been encouraged by reports that experimental treatments using very large volumes of concentrated bone marrow have produced some success in treating osteonecrosis. We are very enthusiastic about the potential of TRCs as a new treatment approach for this indication.

Furthermore, this indication may meet the requirements for an orphan market designation, which we intend to determine. As the clinical plan for this indication develops, we will provide more detail regarding the specific clinical trials to be undertaken.

In the vascular tissue area, our clinical trial utilizing TRCs to treat is limb ischemia in diabetic patients is underway at a major diabetic treatment center in Germany. This controlled and randomized clinical trial is actively enrolling and treating patients. At this time, we continue to believe the first treatment phase of the trial should be completed by the end of calendar year 2006. Given the progress that is being made in this trial, we are now developing our first US clinical site and protocol for this area.

I would now like to take a moment to comment on the topic of company and technology differentiation in the stem cell field.

With the justified excitement that has been occurring, we expect that there will be many reports of new companies and research results in the stem cell field. This development is likely to be accompanied with increased confusion regarding competing approaches and capabilities. With such widespread activity, we can also eventually expect reports of technology, regulatory, and clinical failures with some of the non-Aastrom approaches, which will add further confusion. In the past, many cell technologies have either not been effective in the clinic, were not able to be manufactured effectively for widespread clinical use. This has not been the case for Aastrom.

It is important to remember that Aastrom is distinct from other companies in that our TRCs are already in the clinic for multiple treatment indications. We have already shown clinical data that establishes the ability of TRCs to generate healthy normal human tissues and to be a substitute for large volumes of bone marrow stem cells, and we have demonstrated an ability to manufacture TRCs and support multi-national clinical use of this product.

These important fundamentals should continue to distinguish Aastrom, our TRC product and technology, from others. Over the coming months and years, we believe that our progress of additional clinical results and movement into the marketplace should continue to widen that differentiating gap.

Long bone healing, jaw bone reconstruction, and bone marrow reconstitution -- these are all successful clinical results that have been demonstrated with Aastrom's tissue repair cells, and we hope to add vascular tissue regeneration results in the near future. These clinical results, which have come from multiple clinical center in different countries, are establishing TRCs are safe and appear to effectively stimulate the regeneration of certain tissues in humans. This is the momentum that is driving the Company forward with our focus on clinical use and addressing unmet medical needs.

Aastrom is not about stem cell research. Aastrom is about new clinical products for tissue regeneration. It is this position that we intend to build upon and use to differentiate this company from others.

Now, I'd like to comment on some of the leadership activities that have been occurring within our organization.

As many of you know from following our milestone announcements, we are now engaged in more advanced and broader clinical trial stages. We have started the planning for registration trials in our commercialization approach. As a result of our progress, we have been adding related industry leadership experience to the Company.

Over the past two years, we have added several new members to the management team and to our Board of Directors. We have been able to recently continue this momentum with the election of Robert L Zerbe, MD, to our Board of Directors. Dr. Zerbe, with his leadership of clinical programs another Pfizer, Park Davis and Eli Lily, and his more recent role as CEO and Chairman of the biotechnology company Quattreks, adds an important new dimension to our Board. The addition of Dr. Zerbe, along with our other recent director appointments, provides Aastrom with a diverse and stronger industry-related Board to better assist our management with strategic guidance, industry networking, and corporate governance.

With the revent progress that Aastrom has made across many areas and with the diversified and broadened scope of operation that Aastrom is now achieving, I, along with the rest of the Board, believe that we would benefit from continuing the management team-building process and proactively implementing a management succession plan. The Board is implementing this plan, and we currently expect this process to be completed during calendar year 2006.

Upon the naming of a successor to the position of Chief Executive Officer, and subject to my re-election by shareholders and the Board of Directors, it is my personal intention to remain involved with the Company, providing business and strategic assistance, minimally, as an active member of the Board of Directors with overall responsibilities determined by the Board at that time. I am very excited about this direction, principally because this should lead to a stronger Aastrom.

This completes my prepared remarks this morning. Now, Gerry will provide you with a brief review of the Company's second quarter financial results, and then we will open up for some Q-&-A.

Gerry?

Thank you, Doug.

We ended the second quarter on December 31, 2005, with approximately $26.2 million in cash and equivalence with no debt outstanding. Total revenue for the quarter ended December 31, 2005, were approximately $117,000, compared to $374,000 for the same period last fiscal year, while total costs and expenses increased to $4.5 million for the quarter ended December 31, 2005, compared to 2.9 million for the same period in the last fiscal year. The increase in costs as compared to the last quarter of the current fiscal year are largely due to an increase in research and clinical programs and the result of adopting FASB 123R in the first quarter.

On a cash basis, our costs are consistent with spending in the first quarter, and monthly cash utilization stands at approximately $1.2 million for operating activities and capital expenditures. Our cash position should provide us with the necessary financial resources to fund our projected growth in clinical trials and other research and development costs during the current fiscal year. We expect the average cash spent per month to increase to approximately $1.5 million per month for the balance of the year. This increase primarily results from growth in our clinical trial and research expenses and related staffing additions, and this projected increase is lower than we previously indicated.

During the quarter, we are pleased to announce the award of a small business innovation research phase 2 grant from the National Institute of Health entitled "Clinical Human Cell Production System for Broad Use." The two-year phase-2 grant from the National Institute of Nursing Research totals $798,000, of which, 270,000 has been awarded for the first year of the study. This grant helps support our plans to make our Aastrom Replicell System the foundation for the component technology intended to support large-scale centralized commercial manufacturing of cell-based products, such as our proprietary TRC bone marrow-drive stem cell products.

This concludes our prepared remarks, and we would now like to open the call to questions.

Claudia, please recall the registration procedure for our listeners.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Stephen Dunn with Dawson James Security.

Please proceed with your question.

Good morning, Doug and Gerry. Thanks for taking my call.

Good morning.

On the spinal fusion trial in the US -- I may have missed this -- did you begin enrollment in that yet?

We have not announced that status. The trial is set up, the agreements are in place, and we think that -- we've said that the enrollment should start the first quarter here, and we're not changing that advice.

Okay.

And you did mention that you're planning on starting a spinal fusion trial in Europe during calendar '06 -- do you have a feel for the timing of that?

Again, we haven't given guidance on that other than it is in '06. We are in active preparation, as we've talked about, and, again, these types of trials now have to undergo regulatory approvals in the countries, and we're always reluctant to speculate on exactly when a regulatory approval is going to happen. But, we're very active on the things that we're able to control, and are very comfortable that this should be moving forward this year.

Okay.

Last question, and I'll jump back in the queue.

On osteonecrosis, will you -- are you currently doing pre-clinical studies now, or have you completed that and are preparing to release the data? What timing and events can we see from osteonecrosis?

That is a good question, Steve.

There really is no additional preclinical work. The real preclinical work for osteonecrosis is coming from the clinical data from the non-union fractures and the jaw bone trials.

In other words, we needed to have good clinical evidence of safety in TRCs and their ability to regenerate bone tissue. With that, as well as the increasing evidence and suggestion that bone marrow stem cells could also regenerate vascular tissue, this becomes just what you need in order to address this particular area.

Osteonecrosis is a very attractive market area relative to bone grafting, for example, because there is no effective therapeutic, and if TRCs are effective in this indication, we would expect a -- I'm cautious about the word, descriptive word, I might use but -- maybe a simpler, more defined pathway to the market and into a market where there is no competition. So that's what we want to be targeting TRCs more and more towards, are these markets where there is large unmet need, large opportunity, and our ability to move quickly into these trials is being enabled by our proof-of-concept clinical trial plan. That was the strategy is to get clinical safety and efficacy data of the capability of the cells, and then, select the specific indications that are best for market purpose.

Well, I agree it is a big market. Are you looking -- I guess, what can we expect? Our you filing an IND in the US, or the timing, or -- what is the next step there?

Okay.

This will require an IND submission in the US and would require regulatory submissions in Europe as well for those countries where we had run the trial.

Again, we are -- this is -- I talk about it because this is a targeted clinical direction for us, and that you should look for more defined dates and timelines and so on, for this to occur, but we do have as a 2006 calendar year objective, to be active in a trial here.

Alright. Great.

Thanks. I'll jump back in the queue.

Thanks, Steve.

Thank you.

Our next question comes from Ren Benjamin from Rodman & Renshaw.

Please state your question.

Hi, Doug, this is [Hougie Odine] for Ren Benjamin.

Good morning.

Good morning.

Just for the year, US trial [inaudible] lumbar fractures -- what is the enrollment speed for the addition of 16 patients? How many patients have been enrolled in it so far in this expanded trial?

This is, again, what we've stated, is that, first of all, the 20 patients were all enrolled and treated I think ending in the third quarter of the calendar year -- in 2005, and enrollment, at that point, was picking up at different -- at our different clinical trial sites.

We did add the additional 16. We are actively enrolling those patients, and we're very confident that our stated objective to complete enrollment and treatment during 2006 is going to be met.

Okay.

So that's going to be a completion of the enrollment, the pretrial is going to be in the first half event, or do you think it is going to be, more like, early second half event?

Again, we expect enrollment and treatment, and again, it is hard to pick the exact month for the last patient, but we'll be in -- comfortably be in 2006.

And we have, as I mentioned in my comments, expect to be able to disclose some interim results out of this trial in the coming months.

Okay.

Can you remind us, what is the patient -- what is the normal patient follow-up period after the patient has been treated with TRCs?

The normal follow-up period?

Yes.

Is it six months? I forgot exactly since our last conversation. Was it six months or eight months?

The principal pointed to six months to look at to see if TRCs are able to cause bridging of new bone across the fracture site.

Okay.

And, are we expecting by end of the year additional follow-up -- longer follow-up -- [inaudible] announcement in the future -- in 2006?

We are.

We are trying, and again, here is where we have to look at some of the different studies. The six initial patients in the Spain study, we are in the surveillance stage completing longer-term follow-ups, and getting that data. We have already announced just as a general disclosure that, in the six-months time point, five out of the six treatments had been deemed successful healing, and in the subsequent months, the sixth patient also healed. So, in that study, there were six out of six healing, no adverse events, no problems seen. We're continuing, however, to track those patients a little bit longer term, and we're going try to determine the best venue to report that.

In the US trial, there again, we expect to announce -- be able to disclose some interim results potentially at a national meeting if our abstract is selected, and we'll get more instruction on that when that's firmer. And if not that, we will plan to prepare a white paper -- internal report -- of results for disclosure.

Alright. Fantastic.

Regarding the jaw bone reconstruction trial -- programs -- there's a lot of -- the interim outlook is very encouraging. Are you guys going to -- are you guys planning to update additional longer [inaudible] patient [inaudible] in this year as well?

Well again, in this study, the initial evaluations -- the initial bone analysis -- was done at four months. There is also eight months -- there is also an eight-month data collection point, and then, some longer-term follow-up on the patients. So, yes, we do expect to have additional reports on the status of these patients for the eight-month data, and then, we'll see about longer term.

Okay.

And, depending on the data, what's your guys next plan for the year? Are you going to expand into multiple-site studies in the future, or--?

No, our objective here was to demonstrate to ourselves and to the world that TRCs could indeed generate and three different types of bone. That has different value both now for demonstrating that these cells work, because so many other cells have failed to be successful in these types of indications. So we wanted to show that TRCs are different, that they could generate bone, and not just doing it in one type of a model, but in all three types of bone models. So we thought that was important to be able to make good decision process and ultimately, for market-use of the cells.

We want to focus now increasingly on just one bone graft indication to take forward as a registration pathway, and that is the process we're going through. And, we do not believe that's going to be the jaw bone area as a registration pathway because we feel that that would give us too limited of market access compared to spine fusion or even fractures.

So, with that in mind, we are going to look to explore more clinical work in collaborations and in grants at the moment, but focus our resources, limited as they are, on the -- on what the specific registration pathway is.

Okay. Fair enough.

Regarding the osteonecrosis programs that you guys are going to initiate soon -- can you give us additional colors as to what is going through your mind when you try to design this trial going forward, and what primary goal are you guys expecting to achieve through these pivotal studies in the future?

Our focus is going to be on the largest -- probably the largest market segment of osteonecrosis, which is osteonecrosis of the femur and head of the femur.

The treatment approach that we would explore there would actually be to go into the head of the bone, remove the necrotic tissue that's inside the bone, which ultimately leads to the collapse of the head. So, we would go in, remove the necrotic tissue, implant TRCs into that site, close up the site, and look to see if TRCs can regenerate healthy tissue in that site, thereby, eliminating the progression of that necrotic disease, which leads to the collapse of the hip, which leads to hip -- total hip replacement.

So, the end-point will be -- that we would look to look at would be removal of the necrotic disease tissue, replacing it with healthy tissue, which either halts, reverses, or limits the progression of the disease.

Okay.

What is your standard treatment for the patients with the osteonecrosis? Is it -- is surgery is just the standard core decompression procedure?

Core decompression is used as a standard-of-care, and it's used with limited results. It tends to eliminate and relieve some of the pain and mobility problems that patients have, but does not tend to do any -- have any impact on total hip replacement, and when that is going to occur. So, if you really can affect the disease process, you will delay or eliminate total-hip replacement.

Alright.

Maybe this -- maybe next question comes a little bit earlier, but, going forward for this programs, can you give us additional colors as to the size of the patients you guys are going to initially enroll, whether it going to be a single-center, multiple-centers, in the future, and when do you guys maybe expecting the study can be complete, either this year or maybe you can get some very preliminary results by end of this year? Can you give us additional color on that?

Thanks.

We have a general approach to the clinical trials that we want to try to apply in all of our indications. Now, sometimes that has to be modified, because of the indication or the treatment approaches or so on, but this approach is to start out at a single site, accrue a few patients, get experience with using the cells in that specific indication. We always learn in the first few patients a little bit more about the best way to apply the cells or to handle the surgical procedures and so on. So, we like to get that experience and information at the lead site and that lead site might either be in Europe or the United States. Then, either under that same protocol or new one, but more and more we would probably look for it to be under the same, look to expand then into multiple sites; maybe make some amendments to the procedure based upon what we learned, and then -- but move to multiple sites, and then begin to bring in controls, if that's appropriate, or at least expand, and then, eventually, roll that right into a pivotal study.

So, we expect with tissue engineering types of approaches, you can follow a little different pathway of development than you would think of with a small molecule or a drug, where you might go through different-dosing types of things, and looking at different safety and toxicity issues. In this case, we're really just trying to understand do the cells work, and what is the right way to apply them surgically. As soon as we learn that, we'll start moving right into controlled randomized trials.

Alright. Fantastic.

Two more questions -- one is the diabetic limb ischemia trials, Can you give us additional status on this program? How is the patient enrollment rate going so far, and are we expecting you guys to provide preliminary data from this trial as well in 2006?

Let's just review. This is the diabetic limb ischemia trial that is underway in Bad Oeynhausen, Germany. This trial is utilizing TRCs to regenerate the blood vessels in the legs of diabetic patients who have -- whose disease has progressed so they have dysfunctional vascular tissue, leading to ulcers, infections, and ultimately, leading to amputation.

So, this study is taking very late-stage diabetic patients who have already gone through and are getting no further benefit from any of the standard-of-care remedies, and are on a track towards amputation. So, we're taking very late-stage patients. The cells are being introduced as -- in treatment in two different routes of administration -- one is injecting right into the muscle bed around the vascular tissue, the second route is intra-arterial infusion of the cells down into the limbs.

So this study is randomized with respect to, rather administration, as well as controlling against bone marrow and standard-of-care. This has a very exciting, very interesting, somewhat complex study. It was set up to, again, run the initial patients to get some appearance with TRCs, see if the way of handling and administering the cells is correct, looking at the initial results, and what we're really looking for here is primarily any change in the vascular bed. Patients may be too far advanced for therapeutic effects, but we'll evaluate therapeutic effects as well.

So, very exciting study -- it just began accruing patients in late 2005. The study is actively enrolling. We believe that the study is on track still to be able to accrue and treat the patients in this first segment of the study during 2006.

Alright. Cool.

What about -- you mentioned also during the conference call, you guys are in preparation to buy IND-type studies in the US. Can you give us a little bit additional colors on that as well?

I didn't understand your question.

In the conference call, you mentioned that you guys preparing to starting a phase 2 -- similar studies in the US. in diabetic limb ischemia.

Yes.

What is the status on that? Is it going to be similar -- similar designs in terms of active injecting two different drugs of TRC administration, et cetera, in the US -- in this US study as well?

Well, we're collecting, again, we're preparing and laying out that trial, and having discussions with potential clinical sites. We intend to utilize information from the Bad Oeynhausen trial to help guide us in the design of this study, but I would say we would expect for there only to be one route of administration in this study, and under conditions based on what we -- what we are learning and seeing out of the Bad Oeynhausen trial.

Alright. Fantastic.

One last question I have is regarding the potential partnership discussion. Can you give us status on progress and possibly things that you guys have been maybe through in initiating a discussion -- in the future regarding TRC [inaudible]?

We've been pretty frank about the partnering area in our statements. We don't think the partnering -- large-scale partnering -- for marketing relationships and major contributions in development programs can occur until we get, at least, unequivocal clinical data for the indications that we've been active in, and we're able to establish the manufacturing and distribution through -- to support multi-national studies.

These are all objectives that we talked about for this year. So we're focused now on getting these things in place, which we believe will lead to the types of marketing relationships the Company can best benefit from. So, we do not think that marketing -- or, excuse me -- partnerships -- strategic relationships -- should be expected for some time.

Now, with that stated, we are looking to establish smaller relationships that we think are helpful to our business, whether they're supply relationships or collaboration agreements. We have one of these partnerships in place already, as you might recall, with MTF, the largest commercial provider of [inaudible] tissue in the world. MTF is a partner of ours in our US long-bone fracture trials, where we're utilizing their material, along with ours, in the treatment of the patients.

So we're going to continue to look at some of these key smaller relationships to establish the business, and we think with this in place, then the larger marketing partnerships will come.

Alright. Great.

Thanks for taking my calls, and congratulations, again, for the great progress.

Thank you very much.

Our next question comes from Jose Haresco with Merryman.

Please state your question.

Good morning, guys, and congratulations getting so many milestones in, in the first half.

Thanks, Jose.

Just a couple a questions, and we'll keep it short. On the vascular limb ischemia trials that you have going on -- I'm not sure if I missed it earlier -- did we disclose what the total size of that ongoing trial is going to be?

Yes, the initial phase of the trial is 25 patients, and it is designed that way to, again, gain experience, look at the result. This is such a brand new indication, and so many things were new about this study, we thought best that we accrued a meaningful number of patients, be able to make decisions on how we want to adjust the protocol going forward, and then look to expand it.

And it's a controlled trial right out of the block.

How are we monitoring the quality of the vascular bed, and at what time points are we monitoring?

Yes.

There's a fairly regular schedule of assessments that are being done at different end points, beginning from almost a week after treatment to all the way out to a year for the initial -- initial assessments, and there is a array of things being looked at.

One of the key ones is looking at total oxygen that's been able to move down into the lower part of the limb. They're are also looking at a standard panel of vascular indicators, such as the ABI, or ankle radial index, which allows blood pressure differences between the foot and the heart. Wound repair is definitely being evaluated. All of these patients have severe infected ulcers, which are being monitored for -- are they progressing, are they digressing, improving, and healing. There is also imaging being done of the immediate vascular bed, which is not an end-point, but it's obviously a very important indicator of whether something is happening or not.

So there is a nice, broad panel that's being looked at, and, of course, some of the other standard things, such as the patient able to walk better? Do they have reduced pain in their limbs because of the treatments? These things are being collected as well, but principally, we're looking at the functional -- the vascular functional indexes of the ability of the vasculature to improve profusion of the lower limb down into the wound sites, and then repairing those wounds.

Okay.

Thank you.

On the osteonecrosis indication -- do you envision this being kind of thing that requires surgery, or do you envision this, at some point, if and when it makes the market, that it is something that you simply inject into the necrotic area?

There is lots of visions here I guess would say in this, but I think the one for us to practically look at is -- because this is a complicated disease process where nothing much has worked before, so the approach that we are -- will undertake initially will -- I think, in large part, be the way this will be done for a while. Now, we can see, once they have those results, what other types of approaches might be undertaken, and I want to come back to that in just a second.

But right now, we're going to be looking at patients with defined osteonecrosis, probably stage 2, stage 3, types of categories, maybe even, in some cases, to a stage 4. That means they have -- they have definable disease. They're in pain. They have got necrotic areas in the bone, and first, to treat that, we really need to go in and remove that -- remove the dead tissue -- the edema that's associated with that, causing pain, and then introduce the cells.

So, as the cell introduction, well that requires surgery, maybe not, but the surgery is required to really eradicate the necrotic tissue and to get it ready for the treatment. Now -- and that's where we're going to begin, and if we see effectiveness there, we'll all be thrilled because that will offer a new treatment for major unmet need. This offers a potential of being an orphan indication and fast-tracking and all of those things. So, it's the type of potential area that we all like to strive for and look at. So, we would be very pleased with that.

With that established, and this is true in many of our indications, if not all, we're going to begin with treating the patients who have bad problems. But once we understand the effectiveness of TRCs and addressing these issues, we want to move and more to preventing the bad problems from happening. That may be true in an osteonecrosis indication as well, where, rather than waiting for late-stage disease to develop, being able to go in with an injection of cells into the site at an early stage may not require that surgical -- that surgical capability.

So as we move more and more to preventive types of treatments, we're going to be moving more and more to injectables, percutaneous administrations, that should hopefully eliminate, or really add delays to any surgical interventions.

How much contact have you had with the agency to-date on this particular indication, and if you can, have they guided you in any way as to give you very, very clear path on how to do this right [inaudible] coming out of the gate?

Well, all of the contacts have been informal. We have had contacts, but we have not submitted anything. So there have been informal discussions around the area. As is always the case, particularly with these types of situations, your conversations need to start with the physicians, and working out what is the right treatment approach, what are the issues, how is this going to be done, rolling that into a protocol. Then, the FDA typically works with you on rounding out that protocol and approach with different things. So-.

But we're not in that stage yet?

That's the stage we are.

Okay. We are. Okay.

Lastly, on the management changes that are going on, do you see any further additions to the Board, number one, like Bob Zerbe?

And number two, are there any changes going to happen or additions going to happen, beneath the sea level, whether it's business development or market development or something like that?

Let's start with the board.

With the addition of Bob, that brings us to, I think, six directors -- independent directors -- which was a target that we had really set as a minimum. We are -- it's a soft minimum, but that is something that we think is the right number to be operating in.

We have been extremely pleased, and I can't tell you how excited I am about the members of the Board that we now have, the contributions that they're making to the management team and to our effort, it's just -- it's just so exciting for us. And Bob Zerbe, bringing in all of that experience from clinical development across several major pharmaceutical companies, I mean he -- there is not many of those types of guys out there. I think we were real fortunate to be able to bring him onto our team.

We will look to continue to add maybe one or two more individuals who compliment the existing Board from industry with capabilities. Then, I think that we should be in pretty good shape for awhile.

It is my intention to be able to spend more time to be able to help get these new individuals well integrated into the Company and supporting and being interactive with the management team.

Now, the management team, we have been also adding to an expanding over the last two years, which you've seen. As the Company continues to now expand our clinical programs, we have been -- and looking to expand our activity in Europe, as well, clinically. We have been adding additional staff to help with this process, and we'll look to probably continue to add individuals in the clinical and medical arena.

Okay.

They'll probably be the most visible ones for you.

But cell manufacturing, though, is another area that we're also starting to beef up, and we can look for additional capabilities there.

Can you give us some update on progress on the land activities and expanding capabilities in Europe and Ireland? Is that still on track?

I'm sorry, you faded off.

I'm sorry. Yes. The manufacturing in Ireland -- are we still on track to expand facilities there?

We -- Ireland has been targeted as a site for us to look for doing scale-up manufacturing for commercial level. The question for us is when do we want to trigger that activity relative to the capacity we have at our current -- with our current planned manufacturing.

So, yes, that is still the plan. The timing, though, is we're waiting until we can get clear understanding of when the capacity requirements are going to be needed there, which is allowing us a little more time to be able to organize this activity, which we -- in a -- hopefully, in a more proficient manner.

Okay.

Last question is for Gerry, actually.

Gerry, do you have any sense, at this point, as to what the burn rate might look like for the first half of fiscal '07? Do you think it's going to stay at about 1.5 million a month with the kind of activities you guys are planning on the clinical side, or could it go up from there?

I think it is little premature to give guidance on that, Jose. We're just in the process of reviewing our strategic plan with the Board, and we need to firm up our clinical trial program next year. We're balancing how quickly we can add clinical trials with how quickly we get effective results, and I think our goal is to have a burn rate that matches what creates the most shareholder value.

We're not going to spend money any faster than we need to, but if we see good results in clinical indications, we'll find ways, either through our own cash or through partnering with other people, to address those clinical indications. But we're just in the process of laying that out from a strategic standpoint and haven't really started the budgeting process yet, so we really can't give guidance on that yet.

Okay.

Thank you.

I think -- Jose, if I could just add to that little bit. A major part of the expense that just isn't fixed like our salaries and rent and things like that, are clinical trials, and the way we are trying to approach this -- and I addressed this, at least, indirectly in answering one of the earlier questions -- is we have a current slate of trials that are designed to -- for example, in bone, to give us some proof of concept. We don't intend to take all of those trials forward with additional patients.

So, there should be -- begin to be a shifting of where the patients are going to be coming from in our trials. So when we're talking about some of the new expanding trials, for example, osteonecrosis or, potentially, a pivotal study in bone grafting, that should be accompanied by the ending of some of the trials going on right now and allowing us to shift those resources over to these new studies. So, part of what we'll be going through is working through the time line for where some of these shifts will occur, and which ones are going to continue and in what way.

Okay.

Thank you. That was very helpful.

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Gentlemen, there are no further questions at this time.

Thank you.

So, with that, then, we'll be happy to end the call.

We appreciate the questions. Great discussion.

Thanks to Steve and Jose and Ren and [Hougie] to help bring out some of these points.

We look forward to your continuing to track and support the Company's exciting times, and we'll look forward to our next quarterly call.

Thank you, all.

Thank you.

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