Ocugen, Inc. (OCGN) Q1 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Histogenics' First Quarter 2018 Financial and Operational Results Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would like to turn the call over to Jon Lieber, CFO of Histogenics. Please go ahead.

Thank you, and good morning, everyone. Joining me today on the call is Adam Gridley, our President and Chief Executive Officer; Don Haut, our Chief Business Officer, and Stephen Kennedy, our Chief Operating Officer. A press release announcing Histogenics' financial and operating results for the first quarter of 2018, was issued this morning. For those of you who have not yet seen it, you will find we've 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 are described more fully in our SEC filings and are available on the SEC's EDGAR system and on our website. We encourage all investors to read our 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 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, Jon. And thanks to our stakeholders for joining the call this morning. In the first quarter of 2018, Histogenics demonstrated continued execution in all areas of the business, similar to our performance in 2017. Most importantly, we remain on track to report top-line data from our pivotal Phase 3 trial of NeoCart in patients with knee cartilage damage in the third quarter of 2018. This leads to an expected Biologic License Application or BLA, submission also in the third quarter of 2018, subject to positive clinical and technical data. This positions us to potentially launch of NeoCart in late 2019 if the BLA is approved. As a reminder, the NeoCart Phase 3 is a 249 patient randomized clinical trial that is designed to show the superiority of NeoCart at one year after treatment as compared to microfracture, the current standard of care. The trial will follow patients for three years and is being conducted under a Special Protocol Assessment with the U.S. Food and Drug Administration or FDA. The market is large and growing with approximately 150,000 microfracture procedures in the U.S. each year, and we believe NeoCart maybe a new and improved option for both patients and physicians in the vast majority of these cases. Because NeoCart is leaving cartilage tissue as oppose to cells only or cell seeded on the scaffold, we believe we may be able to better treat cartilage damage in the knee by reliving pain at the source, which allows patients to return to activity more rapidly than the alternative treatment options, while also providing the durability of native cartilage tissue. Our talented team of employees and advisors are diligently following our patients, developing the additional technical data and completing various manufacturing and raw material validations as we prepare the upcoming BLA for NeoCart. This is a massive effort, encompassing all parts of our operations and those of our investigative sites and we thank our employees and the sites for their diligent efforts. In addition, we believe that our innovative Restorative Cell Therapy or RCT platform may have broad applicability in other indications. As part of these efforts we continue to generate data will allow us to realize the broader potential of both NeoCart and the RCT platform. As an example, Cornell University presented new biomechanical data from the Sponsored Research Agreement at the Orthopedic Research Society Annual Meeting in March 2018. We continue to believe these data demonstrate the unique mechanism of action of NeoCart and provide an important link to and potential correlation with the clinical results we have seen in our trials conducted to-date. In addition, we believe these data will help us utilize the RCT platform to provide clinical benefit to patients with other musculoskeletal conditions and support future product opportunities, including the automation of certain aspects of the NeoCart manufacturing process. We also had several efforts underway to support the potential commercialization of NeoCart, we are conducting additional market research with a focus on the care pathway for knee cartilage damage and the potential reimbursement for NeoCart. Importantly we also continue to receive positive anecdotal feedback from the investigators in the Phase 3 clinical trial, most recently when we convened some of the members of our clinical advisory board in conjunction with the American Academy of Orthopedic Surgeons Annual Meeting in March 2018. At that meeting, we received valuable feedback from the clinically meaningful performance attributes of NeoCart. The NeoCart surgical procedure, our long strategy as well as ideas for future product opportunities. Now consistent with our goal of making NeoCart broadly available, we also made significant progress during the first quarter to support the initiation of a planned Phase 3 trial in Japan. MEDINET, our NeoCart development and commercialization partner in Japan is responsible for all development activities in the territory and will conduct the trial, which we expect to commence in the second half of 2018. After signing the agreement with MEDINET in December 2017, we received the $10 million upfront payment in January 2018 and we believe that this partnership will provide long-term value for both companies by bringing in new treatment options for the Japanese market. We are also evaluating additional partnership opportunities in other international markets, which have the potential to create near-term value through licensing payments and longer-term value through additional milestone payments and royalties on any sales of NeoCart in those markets. In addition to the upfront payment from MEDINET, we further strengthened our financial position by raising approximately $5.7 million in net proceeds from a registered direct offering of Histogenics common stock in January 2018. The transaction was driven by demand from several new and existing investors with an objective of minimizing dilution to our existing shareholders. We believe our current financial resources will fund our operations into the fourth quarter of 2018. As we advance towards the potential commercialization in NeoCart, we also expanded our Board of Directors with a goal of adding additional members who have expertise and relationship that can support our growth and identify new opportunities for the NeoCart platform. In April 2018, we were pleased to welcome Sue Washer to the Board of Directors and believe that she will be a valuable addition to our organization. Sue has been the CEO of Applied Genetic Technologies Corporation or AGTC, for more than 15 years and also serves as Director both for Biotechnology Industry Organization or BIO and the Alliance for Regenerative Medicine otherwise known as ARM. We believe she is keen inside that will support our effort to build connections in the broader biotechnology community, including potential partners. At this point, I'll turn the call over to Jon Lieber, to discuss our financials. Jon?

Thanks, Adam and good morning everyone. For the quarter ended March 31, 2018, Histogenics reported a loss from operations of $6.1 million compared to a $6.8 million loss for the quarter ended March 31, 2017. The decrease in overall operating expenses was attributable to a reduction in research and development expenses that was offset by an increase in general and administrative expenses. The decrease in operating expense is reflective of our efforts to aggressively manage our burn rate, while advancing the NeoCart program towards the submission of a BLA to the FDA in the third quarter of 2018, subject to positive Phase 3 data. Moving on to some specifics, the decline in research and development expenses in the first quarter of 2018 as compared to the first quarter of 2017 was due to a reduction in costs related to the NeoCart Phase 3 clinical trial, for which enrollment was completed in June 2017. The increase in general and administrative expenses in the first quarter of 2018, as compared to the first quarter of 2017 was primarily due to higher salaries and consulting expenses related to increased activities to support the potential commercialization of NeoCart. Net loss attributable to common stockholders was $14.4 million in the first quarter of 2018 or $0.52 per share compared to $5.8 million or $0.27 per share in the first quarter of 2017. The year-over-year increase in net loss attributable to common stockholders is primarily due to the conversion of convertible preferred stock issued in connection with the private placement we completed in 2016 into common stock and an increase in the expense related to the fair value of warrant liability, which was partially offset by lower operating expenses. Of note, the fair value of the warrant liability is dependent upon a number of factors including our share price. And increasing share price in the given quarter is likely to result in an increasing in the expense from the change in the fair value of the warrant. As a reference point, we currently have approximately 28.7 million primary shares outstanding and 45.5 million fully diluted shares outstanding. As a reminder, the 45.5 million fully diluted shares include 13.4 million warrants issued in connection with the 2016 private placement. These warrants do not have a cashless exercise provision. So should the holders exercise those warrants prior to their expiration, we will receive approximately $30 million in proceeds. At March 31, 2018 Histogenics had cash, cash equivalents and marketable securities of $15.5 million compared to $8 million at December 31, 2017. 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 fourth quarter of 2018. I'll now turn the call back to Adam for concluding remarks before we go to Q&A. Adam?

Thanks, Don. The data generated to-date in the NeoCart clinical trials and the anecdotal feedback from our investigators and collaborators is very encouraging. We continue to believe that NeoCart will provide an early and robust clinically meaningful response on pain and function and patients with knee cartilage damage and potentially eliminate unnecessary and costly additional surgeries that many patients endure in today's market. In addition, there is a strong correlation in the medical literature between knee cartilage damage and the development of osteoarthritis in the knee. If NeoCart is approved, we believe surgeons will finally be able to offer their patients a treat that may restore their cartilage and potentially reduce the risk of developing osteoarthritis in the knee. This could give patients a treatment option with a very different performance and recovery profile than any procedure or product on the market are currently in development. We believe that NeoCart has significant clinical and commercial potential by treating pain at the source and allowing patients to resume their daily activities more rapidly than currently available alternatives, while providing the long-term durability of native tissue. We are working diligently to transform that potential into reality and I look forward to sharing our progress with you in the months ahead. Thank you for joining today's call. We will now open up the line for any questions. Operator, please open up the lines.

[Operator Instructions] Our first question is from Chad Messer of Needham & Company. Your line is open.

Great, good morning. We're getting close here guys. I'm hoping the next time I'm on a public call with you I can be giving you some heart congratulations. Adam on your prepared remarks, you talked about looking at other business development opportunities, can you maybe just give us your sort of map out how you see and prioritize those. I think Europe has been kind of problematic for your type of product in the past. But how do you view that, and are there any other areas besides Europe and Japan that we should think about?

Sure. Happy to start out Chad and then I'll hand it over to Don our Chief Business Officer and leading this effort. So I think you characterized it well, Japan we have found through the work that we did with PMDA and then of course the subsequent transaction with MEDINET to be a clear opportunity both in terms of speed to market as well as of course and patient needs where you don't have opioids available in a very favorable environment for regenerative medicines. I would characterize China and Korea as falling into that category as well. We know with a lot of the autologous and even allergenic CAR-T therapies that there is a large number of effort in China. And the regulatory process is starting to get streamlined as well. So we're doing quite a bit of work in each of those. And then in Europe, we believe that if the U.S. data are positive, that is likely to be sufficient for regulatory submission. And in that context we probably put that a little bit later just in terms of urgency to clarify the regulatory pathway. Don, do you want to comment a little bit more on the work that we've been doing there?

Yes. So, we as Adam said, we're at the point now where we are really trying to understand better that some of the other large underserved Asian markets and with China and Korea as a focus and we think that there, it looks to us like there is probably an attractive opportunity there. And so that's our - what I would say our first priority right now, Europe certainly is an interesting set of market, but it is at this point behind - in line behind China and other parts of Asia.

All right, that all makes a lot of sense. And then you guys talked a little bit - or Adam you talked a little bit about your platform and thinking about other opportunities. Sort of in that regards maybe just checking in here on your Intrexon collaboration and sort of where that sat and how that may fit into future product opportunities.

Sure, happy to do so. And the way that we think about the Intrexon collaboration and sort of more broadly the platform is everything starts with the current NeoCart autologous product platform for knee and hen of course the manufacturing process. Our goal is to then leverage that into potentially allogeneic platform where you may have the master sell source to be able to automate the manufacturing process, go to very large volumes and candidly as we start thinking about going to other regions in five years from now, we're selling hopefully tens of thousands of NeoCart, we think that's going to be required. We just reported data from this at the Orthopedic Research Society Meeting just back in March, where we were able to show some of the early equivalence data between allogeneic drive NeoCart and autologous NeoCart. And so we are very pleased with those activities, we see a lot of opportunity in that area and we're continuing to evaluate what the regulatory pathways would be candidly the focus has been on the BLA for NeoCart and will continue to be for the next couple of quarters. But we're still pretty excited about where we may able to take that platform opportunity.

Alright, great. Well, thanks and I am looking forward to the months ahead.

Thanks, Chad.

Thank you. Our next question is from Ryan Zimmerman of BTIG. Your line is now open.

Great, thank you for taking questions. Can you hear me okay?

We sure can. Hi, Ryan.

Hi, guys, thank you. So congrats on the continued progress. Can you - in the Japanese trial your partnership with MEDINET, assuming you are starting in the second half of 2018, how should we be thinking about the milestones subsequent to that. So, how long the trial is and just remind investors when you could potentially be on the Japanese market? Thank you.

Sure, so we think that - I am going right to the last part of your question. We think that there is an opportunity to be on the market in Japan sometime in 2021. So about a year plus after the potential launch of NeoCart in the United States. And the way that we get there is that we would intent to start enrollment in the second half of 2018. The assumption at this point for the 30 patient one year study, which is really just a confirmatory study using the same design that we had in the United States. So will probably take about a year to enroll yet on a year for of course the follow-up and then we understand that for a lot of regenerative medicine products the regulatory review process assuming that it's positive is six - maybe 12 months at most it's pretty rapid. So let's look at this 2021 timeframe and Don and Steve and many members of our team have been doing a lot of work with MEDINET, most recently in Japan just a couple of weeks ago. Doing some of the training, getting ready for kick-off so there is a lot of activity in that area.

Appreciate that. And then just, if you could remind investors on where you stand on the BLA submissions just in terms of kind of module completion and how you feel that's going and your comfort level. Assuming positive data in the third quarter?

Sure, so there are three major activities associated with the submission of the BLA or three modules. There is actually four or five, but the three large bolus of activity is around first the clinical, which of course top-line data is projected for the third quarter of 2018. We're following patients very closely, we are doing site audits, working through all of the activities to allow for the unlocking of the database. The second is going to be on the CMC or the technical manufacturing components of our NeoCart manufacturing process and associated biomaterials. Steve Kennedy has been leading those activities with really talented team here internally. And that's where we're going through validation runs, we're going through a number of process validations. And there is a huge effort to be able to assemble all of that information. And then the last is the preclinical modules where we're assembling a number of the historical studies to get ready for that BLA submission. That is currently targeted for the third quarter 2018 obviously at the end of the third quarter coming shortly after the top-line data. So massive effort, lot of activity is going on. We're still feeling good about that timeline. Obviously the top-line data is the most important milestone for all of us and where we're myopically focused. But there is a lot of work happening here internally at the organization to support that.

Wonderful. Thank you guys for the color.

Thank, Ryan.

Thank you. Our next question is from Josh Jennings of Cowen. Your line is open.

Hi, good morning. This is [indiscernible] on for Josh. So my first question, in terms of commercialization in 2019. Will 100% trial and release as in - at that point then have to your data. And I guess what percentage of the enrollees at that point will then have three, four and five years of follow-up?

Good morning good question. At the time of approval, all 100% patients will have two year data probably half will have three year data. And then probably less than the third will have longer term data. As a reminder all the companies that are running these trials prospectively under 9B with the agency are required to run them as three year study. We of course have a special protocol assessment that allows us to file with our one year data, which we think will be pretty significant commercial advantage. But certainly, surgeons and our patients want to know that it has the long-term durability as well. And I would expect that in some form of registry or other, we will continue to follow some of the patients even out pass that. In some cases, we've got patients who have NeoCart implants over seven years ago. So we would expect to have some good long-term data albeit small initially. But then we'll continue to build on that database for future submissions both in publications and then also for label expansion.

Great, that's helpful. And maybe on the market development side, what has been response to I guess recent customer engagement efforts such as recently created Clinical Advisory Board. And maybe can you just walk us through exactly what that entails?

Sure. So we have held a regular meeting of our Clinical Advisory Board, these are really the leaders of our investigated sites. To start to go through what's clinical data we may have. Of course once it's unblended, how we're thinking about our commercial launch strategy, what are some of the new indications. And I think across the board, there is a general feeling of excitement. There is a recognition that there is a great consistency at least in the anecdotal responses that we're seeing thus far. The clinical meaningful response to pain and function is demonstrable. And I think surgeons are pretty excited about us being able to rollout as Don has outlined our commercial strategy in the first year - of going first year as investigative sites we're returning and making sure that we've honed the appropriate training metrics. We're providing the most appropriate data. And then interestingly some of the Cornell data that we've been developing on the biomechanical side generated a lot of interest. And I think the reason for that is that surgeons continue to see as more patients come in really good anecdotal feedback on patients who may be returning for earlier pain relief and better return to function. And we're able to then correlate that biomechanically with some of the biomechanical data that was developed at Cornell. So they see this great clinical result and now we can start to say wide. So I think that was a helpful point of feedback as well. Don and John anything that I may have missed from those discussions?

No, I don't think so, you characterized it well.

Great, thank you.

Thank you. Our next question is from Brandon Vasquez of Canaccord Genuity. Your line is open.

Hi, thanks for taking the question. Adam you had mentioned positive feedback from the initial physicians using NeoCart. Can you maybe just give a little bit of color on obviously the data isn't available, but just anecdotal positive feedback that you're receiving some more details on that. And then just maybe how you think that feedbacks stacks up against your competition that's currently on the market?

Sure, this is Don. I mean the feedback we were getting from our Clinical Advisory Board is fairly uniform in that they say that the patients - their NeoCart patients appear to coming back with very, very positive responses with respect to pain and function and it seems to be happening earlier than they may have expected. And a number of these physicians or - there are physicians who have used lots of other products including product that some would consider competitive out there.

And I think presently - Brandon, sorry I would just add to that even from clinicians who are not on the official Clinical Advisory Board we've heard a lot of good feedback, we've got folks so we got a guy in Southern California who I think I may mentioned in the past has marathon in five months after NeoCart implant. We've got day labor in just outside of Indianapolis who is back at his job full time three months after his NeoCart implant. So, those are all things that kind of; A, make us feel pretty good about the value of the therapy and; B, that the Phase 3 is heading in the right direction. And as a reminder obviously we intend for this to be really a placement of the new standard of care for microfracture. And so we think by and large that most of the people receiving microfracture, which are 150,000 folks a year could be candidates for this - for a NeoCart. And so we think ultimately that that we can tackle most of the market with NeoCart.

Great, thanks. That's all very encouraging feedback to hear. And just as you've had a good start to 2018 executing on a lot of milestones, what - as you look at the remainder of 2018, what kind of initiatives should we expect? What would you consider a successful 2018 as we move through the end of the year? Thanks.

Sure, so I think we started what is obviously driving a lot of value for our patients, our investigators and certainly shareholders is the top-line data for NeoCart. So, that's where we're myopically focused around that 95% of organization is working tirelessly to get to the data into the database, we can unlock that and then subsequently into the BLA. So, that's I think the primary focus for the organization. And at the same time we think this is really a platform, this is a Restorative Cell Therapy platform where we can leverage that into future manufacturing initiatives. We're starting to think about second indications, there are some great feedback that we got from our advisors there. But we do want to stay focused on that first milestone over the next quarter or two. And then of course we're continuing to look at how we leverage our data into other regions and that's where some of the DB initiatives come in. I think it's fair to say that those are probably later in the year or 2019 event it's early days we're going through the commercial assessments. But there is considerable enthusiasm not just for the technology itself, but clearly cartilage repair particularly for those patients that are healthy and active and are looking for better alternatives, doesn't matter whether it's here or Japan or China there is a great congruence in the market need. So this is where we want to make sure we don't move side at a longer term. Once we have that positive data we can then leverage that into other regions and potentially into other indications.

Great, thank you.

Thank you. [Operator Instructions] Our next question is from Swayampakula Ramakanth of H.C. Wainwright. Your line is open.

Thank you. This is RK from HCW. Couple of quick questions as most of my questions have been answered. Just thinking about the Phase 3 data, can you remind us how we would be releasing some of this data and when we should expect detailed analysis from the NeoCart study?

Sure. So we're targeting the release of top-line Phase 3 Superiority Data in the third quarter of 2018 and the goal is that we would initially do that via press release as it's obviously a material event for us. And we would publish that top-line data, which would include achievement of certain endpoints. And from there after we complete the BLA we would likely submit that into variety of peer review publications. There is probably at least a couple of publications that come out of this data set not only the top-line data some of the secondary endpoint, but then also the health economic data as well. We have I think strong commitment to publishing our data. You're seeing that both from the earlier Phase 1 and Phase 2 publications. But then also through some of the recent work that we've done at Cornell, The Orthopedic Research Society and others. So I would expect that you'll see a continuum of publications to come out then in 2019, 2020 and thereafter.

Thanks. Talking about Cornell, in your press release you were suggesting that the data that you are getting from that research collaboration with Cornell could help in automating your manufacturing process. So how should we think about if that is true, and if you're able to incorporate this into your manufacturing? Couple of questions, one how would it impact your COGS and number two, how long would it take for you to get this into the manufacturing process so that you can utilize this once the product is commercialized?

Excellent. Thanks, RK good question. So I'll start out briefly and then hand over to Steve Kennedy our Chief Operating Officer who has been leading the relationship with Cornell. Maybe just as a reminder, this relationship started at the best of the agency, where they have started to ask many of the companies in the industry to also demonstrate biomechanical competence and various other biomechanical measures. And historically have been very tough to test this. And so many of the companies have ended up working with one of the leaders in the industry, which is Larry Bonassar's lab at Cornell University. And so that was the first part of this initiative was be able to respond to that regulatory response. And then the relationship is really locked from there. Steve do you want to jump in and comment on some of the work that we're doing whether it'd be sort of 3D printing to some of the work on manufacturing, it really has turned into a pretty special relationship.

Yes, I think - thanks Adam. I think the most thing how we're going to impact NeoCart manufacturing would be in this most recent poster that was presented at ORS where we're able to demonstrate first of all that the biomechanical measurements that correlated with the biochemical measurement. So that it's fairly straightforward. We can show that the [indiscernible] protect two collagen content of our constructs. The way that those molecules - combinations and molecules exist in the construct correlate with the biomechanics, so that's step one. The problem with that is, is that biochemical measurement is and biomechanical measurement they're both destructive measures. So it was very difficult to use in process monitoring, process control it requires that we make these extra pieces of NeoCart that we can then test offline in the lab. The most recent studies that we've done is actually to measure the biochemical constituent using non-invasive method. So there is these spectroscopic methods called FTII Vmans Spectroscopy [ph]. There is some very sophisticated methods for measuring tissue non-evasive with essentially with the probe we can probe the tissue, measure these biochemical constituents in the tissue and thereby know what - where the tissue is allowing its developmental or can't. So by incorporating that technology into a bioreactor we'll be able to eliminate the need for offline measurements to eliminate the need for sampling, eliminate the need for some of the costs associated for the control testing, while at the same time optimize the production of the NeoCart. So all of that and well it's just kind of an not a lot right there, but all of that results in the ability for us to optimize the manufacturing process, reduced cost and I would expect it to - we'll start to take advantage of some of these techniques once we start to scale up beyond that initial unit of capacity that we'll get approval for when we submit this BLA.

And RK just as a follow-up to Steve's comments, what I would say is just as a reminder for everybody on the call actually. We think sort of the end of that first year of launch, we think we can be roughly at 60% gross margin and we're sort of at that initial capacity. We think we can take that up further doing some of the things A, with more volume and B, doing some of the things that Steve just talked about. Because QC testing is a big element of cost candidly. Keep in mind right now certainly within our autologous product each patient serves as their own lot there is a fair amount of QC testing that goes on. And so overtime if we're able to move to an allogeneic product going back to one of the questions asked before, if we think that also has a big impact - that will have a big impact on lowering costs initially too.

Thank you gentlemen, thanks.

Thanks, RK.

Thank you. And at this time there is no other questions in queue, I'll turn it back to Mr. Gridley for closing remarks.

Thank you operator and thanks to our shareholders for participating in the call today. We think this is a very exciting time for our company and we remain as committed as ever of executing on the significant opportunity offered by NeoCart. We look forward to seeing you at our first quarter Investor Day on June 19, 2018 in New York City, and also announcing the top-line one year superiority data on the NeoCart Phase 3 clinical trial in the third quarter of 2018. Have a great day everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may now disconnect. Everyone have a great day.