Ocugen, Inc. (OCGN) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Histogenics Corporation Q4 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn today’s conference call to Jon Lieber. You may begin, sir.

Thank you 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’ fourth quarter and year end 2016 financial results was issued this morning. For those of you who have not yet seen it, you will 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 business update and our financial results which will be followed by a question-and-answer session. Before we begin our prepared remarks, I would like to remind you that various statements we make during this call about the company’s future results of operations 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 Conditions and Results of Operation sections of our Form 10-K for the year ended December 31, 2015 which is on file with the SEC. Our subsequently filed quarterly reports on Form 10-Q and our Form 10-K for the year ended December 31, 2016 to be filed with the SEC in the first quarter of 2017. Our Form 10-K and other reports are available on the SEC’s EDGAR system and on our website. We encourage all investors to read these reports and our other SEC filings. All of the information we provide in 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 will now turn the call over to Adam.

Thank you, Jon and thanks to our stakeholders for joining the call this morning. Histogenics turned in the strong performance in 2016 with significant progress by the team across all areas of our business. Most importantly, enrollments in our NeoCart Phase 3 clinical trial continues in accordance with our plan with 214 patients enrolled as of the call today. This puts enrollment in almost 90% complete with a pipeline of patients already identified to complete the required 245 patients by the end of the second quarter of 2017. This timing leads to an anticipated 1 year primary endpoint data readout in the middle of 2018, a BLA filing shortly thereafter, and a potential approval and launch in 2019 as planned. Furthermore, we achieved important milestones in the manufacturing portion of the NeoCart development and scaling program with the incorporation of internally produced collagen into the NeoCart Phase 3 clinical trial in the second quarter of 2016. We also reached agreement with the FDA in the third quarter of 2016 on the transitioning qualification plans to NeoCart 3D collagen scaffold based on the work that we have done with Cornell University in the area of biomechanical testing. We also completed the $30 million financing with leading healthcare investors and have cash on the balance sheet that we believe will enable the company to get to our top line Phase 3 data readout in mid-2018. We are now turning our attention to the preparation of the NeoCart BLA filing and potential commercialization. We believe that the cartilage repair market opportunity is currently underserved with patients, physicians and payors, all seeking better alternatives. We believe that the potential benefits of NeoCart, if approved, include a more rapid and durable recovery for the patient, the 1 year superiority endpoint combined with a relatively quick and easy procedure for the physician and this may significantly expand the market. As a reminder, there are currently more than 500,000 procedures performed each year in the U.S. alone to treat cartilage defects in the knee, including approximately 200,000 microfracture procedures. Microfracture, which is appropriate for smaller defects, is very much our target market. Should we able to demonstrate the superiority of NeoCart over this standard of care in our Phase 3 clinical trial and receive approval from the FDA. For perspective at the current reimbursement level of approximately $30,000, every 2,500 NeoCarts sold represents $75 million in revenue. And as such, it does not require a large penetration on the available microfracture market for NeoCart to achieve potential commercial success. As we have also discussed previously, our objective is to maximize the commercial potential of NeoCart internationally, particularly in Japan or Asia more broadly, where the market is large and growing to a greater acceptance of regenerative medicine and the expedited regenerative medicine development pathway available on that market. We have had several positive meetings with the Pharmaceutical and Medical Devices Agency, or PMDA and expect to have the clear path forward that incorporates feedback from the PMDA by the middle of 2017. Finally, we continue to generate valuable on high-quality publications to support the NeoCart platform, do our work with the investigators in the NeoCart clinical trials, and our collaborators including Cornell, Intrexon Corporation and Brigham and Women’s Hospital. Moving on to some of the details regarding our Phase 3 clinical trial and additional accomplishments. As you may recall, we have enrolled 186 of the 245 patients required to complete the Phase 3 clinical trial at the time of our third quarter 2016 conference call mid-November. At the end of 2016, total enrollment was 196 patients on the high-end of our previous guidance for 2016 and an increase of 82 patients or approximately 72% over total enrollment at year end 2015. Enrollment now stands at 214 patients. And as of today, our pipeline of consent to patients which includes those that have agreed to potentially participate in the trial, but have not yet scheduled their scopes totals approximately 245 of the required 245 patients to complete the trial. While not all consent to patients are randomized, these numbers give us comfort that we are on track to complete the enrollment by the end of second quarter of 2017, particularly as the pipeline still continues to build and competition among sites has increased as they raised to complete the seminal perspective U.S. trial. At the investigator level, we currently have 36 sites in the trial, including 4 in Canada. In 2016, Histogenics also received approval from Health Canada to begin the clinical testing of NeoCart in Canada. In parallel with the regulatory process, we strategically selected and initiated a small number of clinical sites based on the number and demographics of the patients served by these sites and in fact have enrolled our first 3 patients in Canada with more on the pipeline. Importantly, we also continue to see a diversification of enrollment metrics across more sites and now have 17 sites that have enrolled 5 or more patients, the minimum number for being treated statistically as a separate site. This is a major improvement from just over a year ago when we are highly dependent on just a few sites for the majority of our enrollment. We note that 7 of the 17 sites were added to the list of those enrolling 5 or more in 2016 and we continue to receive the positive anecdotal feedback from both long time and new investigators related to the simplicity of the NeoCart procedure and the recovery of their patients receiving NeoCart. Of note as of today, approximately half of the 245 patients required to complete the trial have passed the 1 year post implant time point. With enrollment beginning to come to a close, we are pivoting to preparing for the NeoCart BLA filing as well as the potential commercialization of NeoCart. Over the last several quarters, we have been generating and publishing additional data that can support future regulatory filings as well as commercialization activities as NeoCart is approved. For example, earlier this year, we announced publication of the MRI and patient reported outcomes data from the completed Phase 1 and 2 NeoCart clinical trials and the January 2017 issue of the American journal, Sports Medicine. The publication contained data from 29 patients with symptomatic full thickness cartilage lesions of the distal femoral condyle that were treated with NeoCart in these two trials. Safety and efficacy were evaluated prospectively by MRI and patient reported outcomes through a 60-month follow-up period, with 21 patients evaluable at the final time point. Key conclusions from the peer-reviewed publication included the following. The MRI data demonstrated significant improvement in cartilage quality over the first 24 months after treatment with stabilization and maturation there after out to 60 months. And the improvements in cartilage quality were accompanied by consistent and highly statistically significant improvements compared to baseline and patient reported pain and functional clinical outcomes as early as 3 to 6 months after implantation. We believe these data are consistent with the anecdotal feedback from the investigators and our ongoing Phase 3 clinical trial regarding their NeoCart patients and are excited by the potential for NeoCart to offer patients more rapid pain relief and return to function as well as durable recovery. This data also correlate nicely with the data from the biomechanical testing we have conducted with Cornell University that were recently published in the Journal of Orthopedic Research. The summary bound mechanical data were initially presented at the Orthopedic Research Society Annual Meeting in March 2016, with additional data presented at the biomedical engineering society annual meeting in October 2016. The data show the unique properties of NeoCart at the time of implantation and demonstrate our ability to produce high link cartilage tissue ex vivo. Specifically, conclusions from this publication included Histogenics tissue engineered cartilage constructs exhibited mechanical properties approaching the cartilage as early as 3 weeks in coulter and importantly prior to implantation. Combination of cell, scaffold and engineering play an important role in the development of tissue-engineered cartilage implants and there was nominal improvement of all mechanical properties of the tissue-engineered cartilage constructs over time. With frictional properties approaching values by three weeks and compressive properties approach it needing values by 7 weeks. As a reminder, our work with Cornell was also instrumental to our submission to the FDA, where we reached agreement to use that same methodology to demonstrate equivalents of our internally produced scaffold with the current scaffold. While these data will be important to clinicians and patients in explaining NeoCart’s unique, clinically meaningful performance characteristics from the first two clinical trials, we are also leveraging these data for ongoing and future submissions to the regulated authorities both here in the U.S. and abroad such as in Japan. As enrollment wraps up, we intend to leverage our many years of manufacturing experience and the large library of clinical and non-clinical data supporting the NeoCart platform to evaluate new indications and explore new regions such as Japan. To that end, we have continued our dialogue with PMDA in Japan regarding our strategy to utilize our existing clinical data from the U.S. and augment that data from a small number of Japanese patients in the clinical evaluation to gain potential approval there. We have now discussed our clinical strategy and are waiting final feedback from the agency regarding the full approval pathway. In parallel, we are holding with the PMDA formal discussions around our CMC and non-clinical safety data packet which is nicely supported by 10 plus years of manufacturing history. To-date, the PMDA has given us positive feedback on a significant amount of clinical and non-clinical data generated and we believe the entirety of the data will be instrumental in defining an efficient path to conditional or perhaps full approval in Japan. We do expect to have our development pathway identified in the first half of 2017 and we will provide updates when available. Now, we have also continued our discussions with Japanese pharmaceutical companies to secure a potential commercial partnership. For example, in advance of receiving formal feedback from the PMDA, we have been actively building relationships with potential partners, because we believe the feedback will be an important part of building momentum and interest in our partnership discussions with this unique therapy. While hard to predict with any certainty, our goal is to secure a partnership in 2017, which may provide expertise, commercial capabilities and potentially additional non-dilutive funding to support this program and eventual commercialization. In addition, we are continuing our exploratory R&D work through our collaborative research relationships with our scientific founder of Brigham and Women’s Hospital and also with Cornell to look at new product opportunities. It’s early in development, but believe – we believe that there may be a unique opportunity to combine our cGMP collagen and manufacturing and development capabilities with 3D bio printing and future biomaterial forms and applications such as gels, scaffolds and other cell delivery vehicles with the goal of creating next generation tissue implants, manufacturing methodologies and products. While these potential new products are still many years away, we believe the future platform opportunities including new cell types and different biomaterials are enabled by the 15 plus years of research and the recent raw material milestones that will allow us to simultaneously prepare for our BLA submission for NeoCart and leverage those achievements in the future product forms in new markets. Given the early and compelling performance data and feedback we hear on NeoCart we believe we have an opportunity to take these potential product benefits beyond the current indication of knee cartilage for the U.S. market. At this point I will turn the call over to Jon Lieber to discuss our financials.

Thanks Adam. Good morning everyone. For the year ended December 31, 2016, Histogenics reported a loss from operations of $30.3 million compared to $31.8 million for the year ended 2015. The decrease in overall operating expenses was attributable to a reduction in research and development expenses that was offset by a small increase in general and administrative 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 research and development expense in 2016 as compared to 2015 was due to a reduction in consulting and temporary labor costs and raw materials expenses, both of which were offset by an increase in clinical trial costs related to higher enrollment in NeoCart Phase 3 clinical trial. We enrolled 82 patients into the Phase 3 clinical trial in 2016 as compared to 59 in 2015. The small increase in general and administrative expenses in 2016 as compared to 2015 was due to an increase in personnel and facility related costs offset by a reduction in professional and consulting expenses. Moving down the income statement, the company reported a basic net loss attributable to common stockholders of $13.9 million or $0.97 per share and a diluted net loss attributable to common stockholders of $31.4 million or $2.18 per share. The difference in these amounts is primarily related to the change in fair value of the warrants issued in connection with our September 2016 private placement and a related adjustment in shares outstanding. In the fourth quarter we recorded a gain of approximately $17 million on the change in value of the warrants. As a reminder, the warrants are classified as a liability on our balance sheet and are therefore mark to market every quarter. In 2015 the company recorded a net loss attributable to common stockholders of $32 million basic and diluted. As a reference point, we currently have approximately 22.2 million primary shares outstanding and 41.8 million fully diluted shares outstanding. Included in the 41.8 million are 13.3 million warrants issued in September 2016 in connection with the private placement, just mentioned. It’s important to remember that these warrants do not have a cashless exercise provision, so should the holders decide to exercise those warrants prior to their expiration, we will receive approximately $30 million in proceeds. At December 31, 2016, Histogenics had cash, cash equivalents and marketable securities of $31.9 million compared to $30.9 million at December 31, 2015. We expect our total operating expense in 2017 to be between $25 million and $27 million including approximately $3 million of non-cash items such as stock based compensation and depreciation. Based on current operating plans and the expected timing of product development programs, we believe our current cash position will fund our operations into the middle of 2018 or to our top line data from the ongoing NeoCart Phase 3 clinical trial. I will now turn the call back to Adam for concluding remarks before we go to Q&A.

Thanks Jon. 2016 was a record year of achievement and execution for Histogenics and we are thankful for the tremendous efforts of our employees, our investigators and our advisory board members. We achieved the enrollment objective we set for ourselves in second half of 2015 with the end of enrollment now within reach. We also advanced the manufacturing transition and generated valuable data to support the NeoCart platform through our collaborations with Cornell and Intrexon. All while bringing down our operating expenses from previous year levels and with 25% less personnel than at the beginning of the year. We continue to believe that a quick recovery, faster surgeries and less reliance on difficult rehab protocols in conjunction with a strong safety and efficacy profile will provide the boost needed to grow and expand the cartilage repair market, which has been clearly underserved for decades. Based on the data generated to-date and the feedback that we have received from our investigators and collaborators, we believe NeoCart will provide a robust clinical response on pain and function and eliminate unnecessary additional surgeries. 2017 looks to be another rewarding year with a number of important objectives including the anticipated completion of the enrollment in the NeoCart Phase 3 clinical trial, continued progress with the manufacturing transition, the generation and publication of additional data in conjunction with our collaborators to support commercialization of NeoCart if approved and the identification of the regulatory requirements for potential approval NeoCart in Japan and the potential partner. The successful development of cartilage repair therapy takes many years of focus and we are now reaching objective milestones that many through would never be achieved, prospectively enrolling a full U.S. trial in accordance with FDA requirements. As such, we now turned our focus to the top line data read out in the middle of 2018 in the preparation of our BLA application for NeoCart. Thank you for joining today’s call. We will now open up the line for any questions. Operator, go ahead and open up the line.

[Operator Instructions] Our first question comes from Kyle Rose with Canaccord.

Great, can you hear me, alright?

We sure can. Hi Kyle.

Hi, thanks for taking the call. I just I appreciate the update very thorough as always. Thank you for the additional details on Japan and some of the partnership updates. I just wondered if we could talk competitively for a minute. We saw competitive approval for I guess second gen ACI product late in 2016, but we have also seen some additional collagen type focused matrices launch into the competitive market over the past 12 months. Just when you look back on ‘16, you think about the interim time period while you close your trial and get data and submit, just how do you expect the market to develop and where do you see Histogenics continuing to fit in within that ecosystem?

Sure. So first let’s talk about where we see the market developing. I think we talked the other day when I was at your conference. There is clearly a great interest by a number of companies who are all developing therapies for this space. I think what we have also seen is that there has been difficulty enrolling the trials and we have been the first to do that prospectively in the United States. But we also believe that an ideal cartilage defect reparative product really needs to combine cells biomaterials and engineering. And I think that’s where there is the unique properties of NeoCart that will continue to differentiate against some of those competitors. We have to congratulate some of the folks that have gotten approval. I think that’s a great sign from a regulatory perspective. And we all know that the market is very large and underserved. So, we welcome the opportunity for the others to come in, start to educate physicians on the need for better therapies and really our focus will continue to be on replacing microfracture, which is the current standard of care that’s currently our comparator in the clinical trial and those smaller defects that result in a lot of pain and loss of function are very much going to be the target patients, but also those doctors who are not traditionally going to do some of those tougher type procedures. So, we think there is a great market development opportunity. We think its excellent news that some of the folks have been able to receive approval recently and we will look forward to continuing to highlight the benefits that we think NeoCart will bring, earlier return to function, our 1 year primary endpoint is unparalleled in the industry and therefore able to achieve that I think we will be able to grow the market even more.

Great. And then just kind of to build on, on your last point there, can you just kind of speak to the importance of the 1 year endpoint just the sooner return to function and lowering of pain and just you spell that out from a competitor standpoint, how that really will differentiate you when you are in the market?

Sure. So, to the best of our knowledge, there are no other trials that are ongoing or no other products that has been approved that have been able to show superiority against microfracture sooner than the 2-year endpoint. So, it’s public knowledge that our number of trials that are ongoing both biomaterials only biomaterial and cell products and they all have 2-year endpoints. And I think the challenge there is that in many of these cases, these are great products, but it takes 12, 18, 24 months to be able to show a difference against microfracture, which is the good procedure. You have got some variable outcomes, but it does work. So, it’s a very high hurdle to be able to demonstrate differences early as one year. When the previous management and the founders had setup the organization and the trial, they have chosen a one year primary endpoint based on the evidence that we saw on our Phase 2 clinical trial and we saw very early compelling results and improvement against baseline, but also against the standard of care in our Phase 2 as early as 3 to 6 months on some of the individual endpoints. And so I think that from a regulatory and competitive advantage perspective, this will be very compelling. More importantly, when we think about it from a patient perspective, I think this is where we have the opportunity to really grow the market, where patients will ask for a product with preference. If you can demonstrate clinically that you have such an early return to function, you can show a difference against microfracture at 1 year. From them, it’s quality of life, it’s convenience about the rehab and for many of these healthy active patients which is our target patient population they can’t afford to be off their feet for a long period of time. They are chasing around their kids. They are trying to return to support and function. They want to travel. And so if we can show those benefits clinically, we think that patients will very much drive growth in this market. Most of them are currently sitting on the sidelines, because they don’t have the time to go through the long rehab required with microfracture and they aren’t in the spot where they want to wait to years to be able to see a difference against microfracture.

Great. Thank you very much.

Our next question comes from Chad Messer with Needham & Company.

Thanks. Good morning and thanks for taking my question. First, congratulations on another good quarter with the enrollment. This has really been going great for quite some time now. In your goals for the year, one thing you didn’t list explicitly although you talked about it a little bit on your opening remarks is where we hope to get with your partnership for Intrexon. So, maybe just tell us what we should expect to hear about over the course of 2017?

Sure. Thanks for joining the call, Chad and for the question. So, as we have indicated in the past, we have had some very good results from our initial proof-of-concept data based on the partnership with Intrexon, where we are looking to develop allogeneic iPSC cell sources to be used in the ongoing NeoCart manufacturing process. What’s unique about our manufacturing process is because we are able to measure specifications and performance of NeoCart throughout the entire process on an ex vivo basis, we were able to also demonstrate some early proof-of-concept data with those cell sources. We did so and are now turning our attention to defining the best regulatory pathway whether it be overseas or here in the United States to be able to take that into clinical development. So our efforts there continue and I would expect that we have clarity on that in the coming quarters.

Great. Thanks and congrats again on the progress.

Thanks, Chad.

Our next question comes from Josh Jennings with Cowen.

Good morning, gentlemen. This is actually [indiscernible] for Josh. Can you hear me, okay?

We sure can. Hello, [indiscernible]. How are you?

I am doing great. Thank you. I just want to – first of all, I would like to congratulate you on the new publication of the biomechanical data. Maybe could you please provide more color on that? Because we know it’s an in vitro dataset. We know that it will be included in the BLA submission package, but how should we think about this data? How can we translate these in vitro findings into the NeoCart implant – inside for NeoCart implant? Thank you.

Sure. I will take that as a starting point and then turn to both Steve Kennedy, our Chief Technology and Gloria Matthews, our Chief Medical Officer. So, as I think about this fundamentally, [indiscernible], I think you correctly noted that we are using this initially as part of our characterization where as part of the FDA requirements to be able to show the biomechanical properties of these tissue implants. And so we have had very good progress over the last couple of quarters. We noted that we had come to an agreement with the agency regarding using some of those processes to further characterize our raw materials for purposes of including that in the BLA submission. However, I think what we are trying to do is really take that one step further and be thinking about commercialization and be thinking about describing for our investigators and our surgeons, they need mechanism of action and actually showing that why we get the clinical results that we are seeing in our ongoing clinical trial and past clinical trials. It’s one thing to say that you have got early return and function data based on the clinical evaluation, but surgeons are going to want to know why and that’s why we endeavored to better characterize the biomechanical properties, because we know it’s not just about the stress on the implant, the tier forces, it’s friction and a number of other characteristics that are pretty critical for a quick return to function and performance. Steve, do you want to comment further?

Yes, sure, Adam. Thank you. Yes, I think I kind of break this down into two different categories. One, first one really being the manufacturing focus and – excuse me, for manufacturing we now have measurable outcomes of our manufacturing process that really tied to the characterization of the implant itself. So, we know how we can impact as Adam mentioned the surface phenomena, the frictional forces on the implant, the compressibility of the implant and then also how shear affects the implant. So, we can now tie our manufacturing operations to those outcomes and it really helps us in terms of manufacturing optimization in really more fully optimizing our manufacturing process going forward. So, that’s the first category. And then the other piece is as Adam mentioned how we can tie this to clinical outcomes and I think Gloria has quite a bit of experience with these measures. She has actually worked on the source of biomechanical test for quite some time over the course of her career and Gloria, if you can comment a bit on how this would impact things clinically?

Yes. So I think in two main areas this new data really contributes. So, one is in our developing medical affairs pitch to our target market. So, we are starting to build the scientific story and it certainly adds to the better understanding of how the product would work and now how it work more quickly and that brings me to the second point and that is what surgeons – certainly payers and patients want long-term durability. Surgeons are much more in tune to how quickly does my patient get better, how quickly do I look like a hero and get my patient get back to support and how quickly can I get them off say things like opioid therapy. So, so we are talking about the very early period that’s actually more important to the surgeon, the first 0 to 6 months is probably the most important time for their reputation and practice. And so the earlier that you can get people back doing what they need to do as Adam alluded to, the better all-around for the needed the surgeons and this data certainly supports that ability to do that.

Great. And I also would like to touch upon your progress with Japan PMDA, you mentioned that you had several conversations with them already and getting more clarity about the pathway regulatory pathway going forward, maybe could you please just help me to understand the Japan commercial opportunities there how big is the market?

Sure [indiscernible]. I appreciate the question and you are correctly been doing quite a bit of work since we regained rights for the Japanese market last spring of 2016, as we noted previously we are engaged with PMDA starting last summer. Additional meetings in the fall on those have continued in the first quarter of 2017. The market we believe is at least a couple of hundred thousand procedures where it’s about 0.5 million here in the United States. The other elements of the market though that are critical besides the prevalence of cartilage defects is of course the impact and the potential connection to osteoarthritis which is an enormous market. The other thing that is interesting is that culturally there is a greater acceptance for cell therapies, I mean this is a personalized medicine with the patients own cells. And I think there is an opportunity for greater adoption there. And then the last element when you think about the market is the new regenerative medicine laws that were put into place in the fall of 2014. PMDA which is the regulatory agency over there has not only put into place new laws that linked very closely with the reimbursement environment, they are also very much acting on the laws they put into place. And we are looking at a, what I will describe is almost a global or a hybrid regulatory strategy where we have such compelling or early data from our Phase 1 and Phase 2 studies. We have one of the leading clinical programs with our ongoing Phase 3 study and our goal is to leverage that data such that we may be able to achieve approval in the Japanese market here in the next couple of years supplemented by a small data set. So those activities continue and what’s also interesting about this program is this is not a de novo regulatory pathway. We are taking 10 plus years of manufacturing data, 10 plus years of clinical data and bringing that to a market rather than trying to develop a new product and first test in humans. So our goal is to leverage the investments that we have made over the last couple of years and be able to take that into many markets.

Great. Thank you.

Our next question comes from Sean Lee with HC Wainwright.

Good morning guys. Thank you for taking my question. My first one – my first question is on the manufacturing transition, could you provide a little more color on what exactly still need to be done and is there additional regulatory input from the FDA on it. And also after NeoCart is approved how is this going to help your supply and manufacturing situation?

Sure. So we will take the first part of the question first and as we noted, we have already transitioned the probably most critical raw material which is the source collagen solution that’s already in the clinical trial and it has been for about 9 months at this point. We clarified the scaffold strategy back in the fall. And we are in the process of completing those runs to be able to supply that data to the agency. The last couple of sets will be engineering and validation runs for the unique bio adhesive that we have which is a combination of collagen and polyethylene glycol. And those activities will continue in 2017 with a rigor of dialogue with the agency. One of the things that we are planning to do just sort of normal course as we have done in the past is to make sure that we are in regular communication with the agency. They are seeing these data packages well in advance of the BLA. Steve, anything else that you would add that I missed?

No, I think that summarizes it really well. I mean we are sort of in a normal course of events. We have to go through and validate our processes and move forward and we will have that in front and that’s the next real focus for the team.

Excellent and so then to the second part of your question Sean, how does this impact cost of goods sold and what does this mean from a supply perspective, Jon maybe it’s appropriate for you to jump in on that one?

Yes. So I think our initial discussions with PMDA our intent will be to supply the Japanese clinical trial whatever that – in whatever form that trends out to be from our facility here in Waltham and we figure that a way that we can do that. Moving more towards commercial, we have the ability to launch. We will have initial launch capacity out of our facility here in Waltham, Massachusetts. And I think we probably talked with most of the folks, Sean yourself include on the phone about the way we add capacity when we think about adding capacity. So we have initial launch capacity here in Waltham. And again that will be same facility that’s been doing the commercial – the clinical manufacturing. We think we can launch with roughly 60% to 70% gross margins at our expected price point and then of course we would hope to get economies of scale as things grow. With respect to adding capacity as we need to, the nice piece of the way we think about the additional capacity matches up very well with the regulatory strategy from a manufacturing perspective that we have been pursuing. And the way we think about that is really about $10 million of capital is enough to basically procure a new clean room environment manufacturing space. And for that we need to get about 2,500 units of capacity. And so it takes about a year to as long as you dime an existing facility and we do have two existing facilities that have some space. It takes about 1 year to get the equipment in place both the clean rooms and get everything validate and hire the people and train the people. And for that you can get about 2,500 units of production which is about $75 million of revenue. So hopefully that answers that question on Asia supply and just more broadly the manufacturing piece.

Thank you for clearing that up and congratulations on the progress.

Thanks Sean.

Our next question comes from Ryan Zimmerman with BTIG.

Great. Can you guys hear me, okay?

We can. Hi Ryan.

Thanks for taking my questions, congrats on the enrollment. Just on your thoughts around the Asian potential partnerships, I mean just in terms of the transaction that could potentially come out of that as you speak non-dilutive financing, I mean should we just think of an upfront cash payment, how should we think about the milestones, just a little more color I assume will be helpful for investors? Thank you.

Sure, happy to address that. It’s early days, let me sort of caution everyone that we have been doing a lot of work on the regulatory side largely to take off the table any sort of diligence questions on the regulatory pathway and as many of you know our scientific co-founder has a number of connections in Japan, many of our materials and bioreactors came from Japan originally. So there has been a strong process to develop relationships over the last couple of years and those are now starting to come to ahead. When you look at some of the comps, that’s probably the best way to be thinking about this, other competitive deals that have been done recently particularly on the regenerative medicine space tend to have a reasonably sort of sufficient upfront payment and then you are looking at milestones and shared resources associated with the clinical development pathway. As a small company, we bring a lot to the table with some of the best clinical data, fully compliance cGMP capabilities. But we really don’t have the funds to be able to commercialize this on our own. So very much looking at late stage Phase 3 asset that has very meaningful clinical data and we think that will result in a reasonable upfront. But of course we are also looking at making sure that we can maximize the commercial potential with that partner. There is probably two different flavors of opportunities that we are looking at and there is interest from probably both sides. One is going to be a traditional commercial partnership where folks are looking for innovative products regenerative therapies with the clear mechanism of action particularly focused on pain, which is the huge issue in Japan. So there are going to be folks that look at this first from a commercial infrastructure perspective. And there are a number of parties that are selling leg products and other implants physical supplementation and other products to treat OA in that market. The other side of it is there is a great interest in regenerative medicine platforms. This is exactly what we bring to the table as well. It’s not just NeoCart for cartilage in the knee, this can be taken into other applications just allows one to gain a foothold with cGMP capabilities that most folks can’t bring to the market for many years. So those are probably the two types of relationships that we are seeking to identify each of them may have different metrics, but we think that as partners look at this decent upfront and then back end milestones. Our goal is to make sure that this is fully funded and we can reinvest in the business with those funds.

Great, that’s it for me. Thanks guys.

Thanks Ryan.

[Operator Instructions] And I am not showing any further questions at this time. I would like to turn the call back to Adam for closing remarks.

Thank you, Kevin and thanks to shareholders for participating in our year end call. As we committed to you all 18 months ago when we laid down our new operations plan we promised execution, transparency on our enrollment metrics and the thoughtful financial mindset for managing our operating expenses and I think that we have delivered on that commitment. We now look to wrap up enrollment of the NeoCart trial, lay the groundwork for a potential submission and the successful launch of this important therapy if approved. So we look forward to updating you all on the coming year on our continued progress. Thanks for your continued support and have a good day.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect. Have a wonderful day.