Ocugen, Inc. (OCGN) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2016 Histogenics Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to turn the conference over to your host for today Jon Lieber, CFO of Histogenics, you may begin.

Thank you. Thanks and good morning everyone. Joining me today on the call is Adam Gridley, our President and CEO; Stephen Kennedy, our Chief Technology Officer; and Gloria Matthews, our Chief Medical Officer. A press release announcing Histogenics’ third quarter 2016 financial results was issued this morning. For those of you who have not seen it yet, you’ll find it posted in the Investors section of our website at www.histogenics.com. On our call this morning, we will share with you a brief business update and our financial results which will be followed by a Q&A session. Before we begin our prepared remarks, I’d like to remind you that various statements we make during this call about the company’s future results of operation and financial position, business strategy, and plans and objectives for our future operations are considered forward-looking statements within the meaning of the federal securities laws. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions and uncertainties. These risks are described in the Risk Factors and Management Discussion and Analysis of Financial Condition and Results of Operation section of our Form 10-K for the year ended December 31, 2015, and Form 10-Q for the quarter ended June 30, 2016 which are on file with the SEC. Additional factors may be set forth in the sections of our Form 10-Q for the quarter ended September 30, 2016 to be filed with the SEC in the fourth quarter. Our Form 10-K and other reports are available on the SEC’s Edgar system and our website. And we encourage all investors to read these reports and our other SEC filings. All the information we provide on this conference call is provided only as of today and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events or otherwise. Finally, please be advised that today’s call is being recorded and webcast. I’ll now turn the call over to Adam Gridley.

Thank you John and thanks to all of our stakeholders for joining the call this morning. The third quarter of 2016 was a story of continued execution for the Histogenics team. In addition to our continued operating execution, we completed a significant financing with leading healthcare investors and have cash on the balance sheet that we believe will take the company through our topline phase 3 data in mid-2018. Our investors both new and existing share enthusiasm and long term vision for NeoCart and the Cartilage Repair market. We believe that the benefits if NeoCart is approved include a more rapid and durable recovery for the patient, combined with a relatively quick and easy procedure for the physician and we believe this will significantly grow the existing market. Enrollment in our NeoCart phase 3 clinical trial continues to run ahead of plan with 186 patients enrolled as that today after recently announcing our 75% enrollment completion milestone a few weeks ago. We continue to reaffirm our plan to complete enrollment by the end of the second quarter of 2017 with some potential upside available if our enrollment trends continue. This timing leads to anticipated one-year superiority data readout and the biologic license application for BLA to filing in the middle of 2018 and a potential approval and launch in 2019. Besides our myopic focus on enrollment we continue to look toward commercialization as we develop manufacturing capabilities in anticipation of our BLA filing and subsequent launch. We have additional good news from the FDA confirming our equivalent strategy for our collagen 3D scaffold based on some of the compelling biomechanical testing that we conducted with Cornell University. As we noted on our last call, we're not just thinking about commercialization in the US, but are rapidly seeking to define regulatory pathways in Japan to capitalize on the growing Japanese market in the expedited regenerative medicine development pathway there. We have a series of positive meetings with the pharmaceutical and medical devices agency or PMDA in September. And we're pleased with the feedback and look forward to formalizing our strategy with PMDA in the first half of 2017. Lastly, with the completion of our initial proof of concept work with Intrexon Corporation and the compelling data generally to-date we intend to move into similar discussions on the most appropriate clinical development and regulatory pathways for that product candidate. Moving onto some specific metrics around our phase 3 clinical trial and accomplishments for the quarter. As you may recall, we have enrolled 167 of the 245 patients required to complete the phase 3 clinical trial at the time of our second quarter 2016 conference call in early August. As of today it’s noted, we currently have 186 patients enrolled in the trial. We had a record August for example with 11 patients and a strong September and October with six patients each. Even with several of our top enrollers either on vacation, traveling or presenting at leading medical and scientific cartilage repair conferences. For the quarter, we had a total of 19 patients, a record for our traditionally slower summer quarter and we've enrolled 72 patients so far this year and almost 70% increase over the comparable period in 2015 and consistent with our performance in the first half of 2016. As of today, our pipeline of consented patient which includes those that have agreed to potentially participate in the trial but have not yet scheduled their scope totaled approximately 205 of the required 245 patients in the trial. As a result of this continued positive momentum, we expect to meet our updated enrollment guidance from last quarter where we revised our target to 190 to 200 patients by the end of 2016. And we remain confident that we will complete patient enrollment by the end of the second quarter of 2017 with some potential upside as we move into the first quarter, which is historically our strongest calendar quarter. At the investigator level, we currently have 33 sites in trial with some of our newest investigators performing their first NeoCart implant with good results and we continue to look selectively at augmenting the investigator based as appropriate as we near completion of the trial. We also had a recent meeting of the Data Safety Monitoring Board or DSMB where the safety profile of NeoCart continues to be excellent and the trial of course has continued to decline. Our internal teams are quickly turning their focus to the NeoCart BLA filing as well as preparing for the potential commercialization of NeoCart. Our activities in these areas include generating and publishing additional data that can support future regulatory filings as well as commercialization activities. Two examples of this are data from the biochemical testing we've conducted with Cornell University that represented at ORS in March 2016 and then also at the Biomedical Engineering Society Annual Meeting in October of 2016. These data show the unique property of the NeoCart at the time of implantation and demonstrates our ability to produce high link cartilage tissue ex vivo. This work led to our recent FDA approval to use the same methodology to demonstrate equivalent and qualify our internally produced scaffold and validates our long-term strategy covered in our Type C meeting with the FDA in 2014. While these data will be important to clinicians and patients and explain NeoCart’s unique performance characteristics throughout the leveraging the comprehensive data package in our discussions with the regulatory authorities. Given the productivity of our sponsored research agreement with Cornell and the expertise in tissue engineering of Dr. Lawrence Bonassar, we recently announced the addition of Dr. Bonassar to our scientific advisory board. We believe our clinical data is quite compelling, particularly at early end points and the translational work our collective teams are doing at the bench provide the scientific basis, mechanism of action and additional confidence on the reproducibility of the results we've seen thus far. As enrollment wraps up, we intend to look selectively to expand the utility of this platform and a robust data generated this far in clinical trials of both the new indications any regions such as Japan. To that end, we had several continued productive meetings with the PMVA regarding our strategy to utilize our existing phase 1 and phase 2 data from the US studies and augment with a small dataset of Japanese patients. We had two separate meetings one for manufacturing and one for clinical where amongst other things we reviewed our plans to support Japanese trials from the US with the large compendium of pre-clinical TMC data. We also discussed the already available demonstration of probable efficacy and safety from the clinical trials we've conducted to-date as well as the purpose used to describe requirements for conditional approval. Our dialog with PMVA regarding our unique cell therapy program continues to be positive and we expect to move into formal meeting process with PMVA in the first half of 2017. In parallel, we’ve started to engage with potential Japanese pharmaceutical or medical device partners most recently at the Sofinnova Japan conference a few weeks ago. This conference is a premier event attended by many of the leading Japanese pharmaceutical companies all with a keen interest in regenerative medicines, both culturally and as a result of the recent laws enacted in Japan to accelerate the development process. With several Japanese investors and co-founders who are excited to bring the hybrid US Japanese regulatory strategy to PMVA to advance our program. While hard to predict with any certainty, our goal will be to secure a partnership in 2017 which may bring expertise, commercial capabilities and potentially additional non-diluted funding for this program and eventual commercialization. We’ve also continued to advance our program with Intrexon Corporation to develop next-generation allogeneic products. The initial focus of much of the work done to-date was to use Intrexon iPSC technology to potentially isolate and reprogram chondrocytes for use as a master cell line in future applications in NeoCart. During the first three quarters of 2016, Histogenics manufacturers an optimized second generation NeoCart implants using iPSC derived chondrocytes supplied by Intrexon. These iPSC derived NeoCart implants produced at Histogenics exhibited similar critical biomarkers of cartilage production to those in our current manufacturing process. We're now working with Intrexon employing together an integrated development in regulatory strategy that we can present to the regulatory authorities either in the US or abroad. And in addition to our work with Intrexon, we're doing some limited work through our SRA with Cornell on additional next generation products specifically in the area of 3D printing of tissue. Of course the primary focus of our work with Cornell continues to be the biomechanical characterization and testing of NeoCart and the underlying raw materials for submission with the FDA and in support of our potential commercialization efforts. However, we believe there is a unique opportunity to combine our cGMP collagen with Cornell 3D bio printing technology to create next generation tissue manufacturing methodologies and products. While it is early days, we believe that the work in 3D printing in tissue has the potential that the meaningful impact on the market and our business in the future. In fact, we recently prevented some of the data as part of a poster presentation at the International Society for Biofabrication or ISBF at Wake Forest University in late October. At this point I'll turn the call over to Jon Lieber to discuss our financials.

Thanks Adam. For the third quarter of 2016 Histogenics reported a loss from operations of $6.6 million compared to $8 million in the third quarter of 2015. The decrease in overall operating expenses was attributable to reductions in both research and development and general and administrate expenses and is reflective of our efforts to aggressively manage our burn rate while advancing the NeoCart program. Moving on to some specifics. The decline in R&D expense in the third quarter of 2016 as compared to the third quarter of 2015 was due to a reduction in consulting and temporary labor cost, hiring fees and raw materials and patient recruiting expense related to the NeoCart phase 3 clinical trial. These amounts were partially offset by increased clinical trial costs related to increased enrollment in the NeoCart Phase 3 trial and an increase in facility-related expenses. The decrease in G&A expenses in the third quarter of 2016 as compared to the third quarter of 2015 was due to a reduction in hiring fees, facility related costs and legal consulting costs which were partially offset by increase in stock-based compensation expense. Moving down the income statement, for the third quarter ended September 30, 2016, the company reported a net loss attributable to common stockholders of $9.2 million or $0.70 per share compared to net loss attributable to common stockholders of $8.1 million or $0.61 per share in the third quarter of 2015. The increase in net loss attributable to common shareholders is primarily due to accounting charges related to the warrants issued as part of the financing that was completed in September 2016 and was partially offset by the operating expense reductions just discussed. As a reference point, we currently have approximately 15.9 million primary shares outstanding and 41.6 million fully diluted shares outstanding. However, we believe a better way to think about the shares outstanding given that the warrants issued in the transaction do not have a cashless-exercise provision is to look at the fully diluted share count using the treasury stock method which takes into account the proceeds from the exercise of the warrant. In this instance, I’m using a share price of $2.40, the result is approximately 28 million shares outstanding. At September 30, 2016 Histogenics had cash, cash equivalents and marketable securities of $38 million compared to $30.9 million at the December 31, 2015. Based on our current operating plans and the expected timing of product development programs, we believe our cash position will fund our operations into the middle of 2018 or through our topline data from the ongoing NeoCart phase 3 clinical trial. As we announced on our August conference call, we did take certain steps in June, 2016 to reduce our burn rate for a combination of deferral of non-core expenditures and personnel reductions. We are currently working through our 2017 planning and budgeting process and will be providing formal guidance in the first quarter of 2017. However, we believe that total operating expenses in 2017 will be below 2016 levels as a result of the cost reductions implemented in the second quarter. For 2016, we expect full year operating expenses to be approximately 29 million. This compares to 31.5 million in total operating expense in 2015, despite having enrolled more patients in the NeoCart trial and making significant progress on our manufacturing issues this year. I will now turn the call back to Adam for concluding remarks before we go to Q&A.

Thanks, Don. We couldn’t be more pleased with our continued progress over the last quarter. Over the last several quarters, we have delivered against our plan for the NeoCart trial as well as continued with the manufacturing upgrades and transitions. We appreciate the patience of our investors, as we revamped our strategy to recruit patients in to our phase 3 trial, accelerated our work on our biomaterials transition and advanced our pipeline. We've expanded our work with our Scientific Advisory Board and academic partners and our data continues to impress these collaborators and the investigators in our trial are seeing first-hand, the clinical results at least anecdotally. We continue to believe that quicker recovery, faster surgeries and less reliance on difficult rehab protocol in conjunction with the strong safety and efficacy profile will provide the boost needed to grow the cartilage repair market, which has clearly been underserved for 50 plus years. We believe NeoCart will provide a robot clinical response on pain and function and eliminate unnecessary additional surgeries. Importantly, we've removed the financial overhang that was clearly impacting us in the public markets. With the recent funding, we can focus on building upon this great platform and very much appreciate the support provided by the investors that were interactive to this important therapy. We acknowledge that these are long, expensive development projects and are now accelerating to our important top line data readout in the middle of 2018. Thank you for joining today’s call. We’ll now open up line for any questions. Operator, please go ahead and open up the lines.

[Operator Instructions] And our first question comes from Josh Jennings of Cowen & Company. Your line is now open.

Hi. Good morning. Thanks for taking the questions and congratulations on continued progress in enrollment. I just wanted to start off, I know you've done a lot to enhance the enrollment trajectory, including news sites and I just wanted to hear a little bit about new surgeons have become investigators over the last six months or so, just how easy has it been for them to learn the NeoCart procedure and then what’s the early experience been.

Excellent. Thanks, Josh for the question. I’ll ask Gloria Matthews, our CMO to address that question, given that she's in the field and working with these investigators regularly.

Hi, Josh. It’s actually been a very nice up ramp. We’ve - we brought on a number of sites in the last six months and we also have some sites that were brought on board earlier than that that have done their first cases and it's interesting how quickly, we give them fairly minimal training at less than an hour, training, there's no labs or anything and they do it in literally 15 to 20 minutes, sometimes 30 at most and it’s rather easy procedure for the staff as well as for the surgeon. We've been getting some videos and pictures so that we can show people when we eventually go to commercial release and just a simple procedure.

Great. And just a follow-up for you. There's been some modifications to the Phase 3 inclusion exclusion criteria. And could you just help us just with what types of cartilage lesions are being enrolled into the trial. Is it broad based, is there a specific lesion set that's more common, any details you can provide?

Sure. The addition of the trochlear lesions to the inclusion criteria has helped to increase enrollment, better than I think and maybe we might have predicted. We’ve had about a 30%, well and put it differently, we have that approved as of December of 2015 and we have to get IRB approval of each of those - of the new amendment. That took about a month. So we literally had this in place since late January and since then, roughly 30% of the new cases have been trochlear lesion and the rest continue to be several hundred.

And then I guess for Adam, just thinking about the manufacturing systems build-out, I mean, can you help us understand what are the risks in terms of being able to scale manufacturing. You've had a lot of progress, you've incorporated the internally produced Collagen, but just wanted to understand more fully, are there risks to getting manufacturing to scale?

Sure. Great question, Josh and I've got Steve Kennedy, our Chief Technical Officer here as well who will likely comment. I think a couple of the major risks actually have started to come off the table just in the last couple of months. The primary risks that we've disclosed over the last couple of years were some of the critical raw materials that are used in the manufacture of NeoCart. This is a supplier risk, it’s a compliance risk and then obviously very expensive. And so the program we kicked off about 3 years ago has really been bearing fruits over the last couple of quarters with up to three sort of clearances from the FDA on how we bring those materials into our commercial production suite. So I think that was probably the biggest risk and we're starting to take that off the table very rapidly based on some of the good news that we've had over the last couple of years. And as we think about commercialization, I think our strategy has always been to responsibly prepare for commercialization without building out massive brick and mortar facilities to support the potential ramp. And so I think as we think about commercialization, we move much more into sort of standard operating launch risk, which is making sure that you're never going to probably go in back order and at the same time, you don't create additional capacity that hurts your gross margins. Steve, do you want to comment further? I think we're moving much more into sort of daily operating manufacturing strategy and execution and some of the big risks that now come off the table.

Yeah. I think you made very good point Adam and the one - the sentiment really right now is really about process risk and understanding what are your key operating variables and the ranges that we need to run with them and how do we optimize the process and I think one of the unique things about cell therapy, I call it a cell therapy in general, is that we have to produce a NeoCart for every single patient. So we naturally get that operating experience to be able to study our process ranges. And so that's unique and I think it really do risk at the process side. And then the other piece of that is once the trial is completed, we do have a plan in place to be able to actually study those key operating variables in a very defined way, using statistically designed experiments, so that we can really hit the ground with a completely optimized process right at launch. So I think that that part of it is, it gives me a lot of sense of security that that next level of process risk is going to be addressed when we start commercialization.

Great. Thanks for that. And my last question is just two more updates on the interest on collaboration and I was just wondering if you could give us an update just on whether or not you feel like you're ahead of pace from the initial plan at inception of the collaboration with Intrexon? Thanks a lot.

Sure. Great last question, Josh and I think the top level answer is we've made excellent progress and probably a bit ahead of plan. Now when we signed the agreement back in the fall of 2014, it was intended to be very exploratory. We expected for a couple of years, we were really working through typical R&D experiments, some characterization and as we noted publicly over the last couple of quarters, we've actually moved to proof of concept pretty quickly. Now that comes from, I’d say, two contributions. One from the Intrexon side based on excellent work. Their R&D team is really talented and they move very quickly. So we've been able to very rapidly define a potential master bank using the reprogramming and ITSC technologies. So that's one contribution. The other unique characteristic about this program is because we have very specific biomarkers, the manufacturing specifications for the manufacturer of NeoCart, which is on an ex vivo basis, we can then very quickly demonstrate comparability or equivalent and rerun new NeoCart implants. Normally, for other therapies, you have to actually implant in to the patients then taking biopsies. None of that exists because of our very controlled manufacturing process that Steve was talking about. So I think both of those elements have allowed us to move very quickly and in less than two years, we've already demonstrated proof of concept. Next steps for us are moving into the definition of regulatory strategy. We want to make sure that future R&D efforts and clinical development strategies are well informed and socialized with FDA and other regulatory bodies. So that's where we're moving into those discussions in the next quarter.

Thank you. And our next question comes from Chad Messer of Needham & Company. Your line is now open.

Great. Good morning and thanks for taking my question and let me add my congratulations on another quarter of good progress with enrollment. This is starting to become pleasantly monotonous and I hopefully will remain so for a couple of more quarters. I was hoping you could maybe give us a little bit more on the Japanese strategy. I know you stated your goal is to get a partner hopefully in 2017, obviously a loose timeline there, but was wondering what you hope to get specifically out of your formal meetings with regulators over there, now that you have had the chance to talk to them informally, is it a list of studies that need to be complete. What guidance are you hoping to get from them when you meet with them formally?

Thanks, Chad for the commentary and the questions. So the strategy in Japan is actually pretty straightforward where we are seeking to eliminate any uncertainty regarding the clinical and regulatory development pathway, given that there are some new laws put into place about two years ago. So our strategy is to move far long in the regulatory process with PMDA to define exactly what you've just described. What clinical trial may be required for conditional approval and then associated marketing approval many years later. Is manufacturing and/or other data that we are supplying from the United States sufficient? And so we've had very sort of detailed and also very collaborative discussions with PMDA. The way that the regulatory process works is that you start with informal meetings where you are defining the list of topics in questions for them, the formal meeting. Think of it almost as a pre-IND meeting or the equivalent of in the United States. And our goal is to get that clarity because we think it’s going to be meaningful for potential partners. There are a couple of therapies available there, but because these laws are new, any potential partner is going to want to understand what is the timeline and what is the strategy to bring it to the market. We think that because of the large compendium of US data that we're bringing to Japan, we're going to be in the best spot to negotiate what that process looks like and we think that also create additional interest in value for potential partners. So we’re really running both of those in parallel. We know that the partnership opportunities in Japan may take some time. But we want to eliminate any of the uncertainty regarding how long it will take to bring it to market so that we then collectively with a partner can think about taking it through final clinical trials, which we expect to be a small number of patients and then bring that into the market. We don't have the capacity nor do we expect to build our own sales force in Japan and I think that is the strategy of many companies in the United States, regardless of size and so we want to make sure that we can contribute with our regulatory expertise and then be able to hand it off and partner with a pencil license or commercial partner.

Thank you. [Operator Instructions] And our next question comes from Kyle Rose of Canaccord Genuity. Your line is now open.

Good morning. This is Dan on the line for Kyle. I was wondering the patients that are enrolling in the study soon or does that materially influence the ability to get the submission in earlier than the expected timeline right now. And if so how does that impact approval.

No. I don't believe there'll be any impact. The timelines that we've provided publicly, which is enrollment completed by second quarter of ‘17, top line data readouts by mid-2018, that all sort of contemplated in our public guidance. So we believe that those time lines are on track. We've indicated that there are some potential upside in terms of completion of enrollment which we’ll continue to update our investors on, but otherwise all the timelines very much incorporate our expected time to capture the data, turnaround for data based laws and then of course capturing any of the patient reported outcomes.

Thank you. [Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the call back over to Adam Gridley, CEO for any further remarks.

Thank you, operator and thanks to our shareholders for participating in our quarterly call. We're very proud of the progress we've made over the last several quarters. This is an extremely difficult phase that has historically been under served and we look forward to reporting our continued progress as we wrap up enrollment of the NeoCart trial. We acknowledge and we're grateful for the continued support of our investors, our employees and investigators as we develop this important new personalized therapy for cartilage defects. We look forward to updating you on our next call. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.