Plus Therapeutics, Inc. (PSTV) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the Cytori Therapeutics Third Quarter Earnings Results Call. [Operator Instructions] Before we begin, we want to advise you that over the course of the call and question-and-answer session, forward-looking statements will be made regarding the events, trends and business prospects, which may affect Cytori's future operating results and financial position. Some of these risks and uncertainties are described under the Risk Factors section in Cytori's Securities and Exchange Commission filings, which Cytori advises you to review. Cytori assumes no responsibility to update or revise any forward-looking statements to reflect the events, trends or circumstances after the date they are made. It is now my pleasure to turn the floor over to Chris Calhoun, Cytori's Chief Executive Officer. Sir, you may now begin.

Thank you, Jackie. Good afternoon, and thank you for joining us today. I'm Chris Calhoun, Chief Executive Officer of Cytori, and I'm joined today by Doctor Marc Hedrick, our President; and Mark Saad, our Chief Financial Officer. I will begin by discussing our third quarter financial performance and Commercial business as summarized in today's press release. I will then move on to a discussion of the exciting partnership we announced this week with Lorem Vascular. And after that, I will cover our progress with the ATHENA trial and with our BARDA contract. Let's start with our financial performance. We ended the quarter with $13 million of cash, cash equivalents and accounts receivable. Subsequent to the end of the quarter, we received an additional $12 million related to our strategic partnership with Lorem Vascular, and we expect to receive an additional $12 million by the end of this quarter. The company has sufficient cash to achieve our projected 2014 milestones including advancing to the second phase of our BARDA contract and the full enrollment of ATHENA I and II trials and to the presentation of the ATHENA trial data. While the balance sheet has strengthened, we will continue to pursue additional strategic partnerships. Total revenue for the first 9 months of 2013 were $8.7 million compared to $7.2 million for the first 9 months of 2012. Based on the orders received in the third quarter that will be recognized as revenue in the fourth quarter, current orders at the sales funnel in the fourth quarter and the ongoing BARDA contract revenues anticipated in the fourth quarter, we want to reiterate our full year 2013 revenue objective of $14 million in combined products and contract revenue. Gross profit for the first 9 months and quarter ended September 30, 2013, were $2.1 million and $0.7 million, respectively, compared to $2.2 million and $0.6 million for the first 9 months and quarter ended September 30, 2012. R&D expenses for the first 9 months and quarter ended September 30, 2013, were $12 million and $4.1 million compared to $9.6 million and $3.6 million, respectively, for the first 9 months and quarter ended September 30, 2012. The planned increase in Research and Development expenses is predominantly related to reimbursed services performed under the BARDA contract in addition to increased clinical trial cost. SG&A expenses remained flat over the same period of last year. For the first 9 months and quarter ended September 30, 2013, SG&A expenses were $18.7 million and $6.1 million, compared to $18.9 million and $6.2 million for the first 9 months and quarter ended September 30 of 2012. The net loss for the first 9 months of 2013 were $16 million or $0.24 per share, compared to $28.5 million or $0.49 per share in the first 9 months of 2012. The net loss for the third quarter of 2013 was $5.1 million or $0.08 per share, compared to $11.2 million or $0.19 per share in the third quarter of 2012. The reduction of net loss for the first 9 months of 2013 is predominantly attributable to gains totaling $9.3 million from the sale of Puregraft in the third quarter of 2013 and from the gain on previously held equity interest in the Olympus-Cytori joint venture in the second quarter of 2013. Looking ahead to 2014, we will continue to carefully manage our operating cost and our cash position. We expect our quarterly burn to continue to decline next year. SG&A expenses are expected to remain stable or reduced below current levels. Should we advance to the next phase of BARDA as planned, our R&D expenses would increase, which would be more than offset from reimbursed contract revenues. Now let's talk about our strategy and our partnership with Lorem Vascular. Our long-term goal is to have Celution Systems in every major hospital around the world. To accomplish this goal, we need sales and marketing muscle, resources and market access. Lorem Vascular is the first in what we expect will be multiple sales and marketing-focused partnerships that build on our current regulatory approvals, clinical data and operate locally to accelerate our global revenue growth and technology adoption. Lorem Vascular is a new company founded by Mr. K.T. Lim, a highly successful entrepreneur and investor, to bring Cytori Cell Therapy to patients in some large Asian markets. Lorem Vascular has committed $7 million in opening product purchase orders to back up that commitment. Their plan is to aggressively address what they believe will be an $8 billion revenue opportunity over the next 10 years. To accomplish their plan, they've developed a regulatory clinical and commercial approach tailored to these targeted markets. As a result of that, Cytori would receive $3.5 billion in revenue under our product supply agreement. This would be in addition to the $500 million in license fees to be paid as commercial milestones. Now I would like to update you on our 2 ATHENA trials. The ATHENA trials are our most advanced clinical program in the U.S.. The ATHENA trials are prospective, multi-center, double-blind, randomized and placebo-controlled clinical trials, investigating Cytori Cell Therapy for heart failure due to ischemic heart disease. The ATHENA I trial will enroll 45 patients at a low dose at 8 trial centers. The ATHENA II will enroll 45 patients at a high cell dose at 10 trial centers. During the recent quarter, Cytori sought feedback from its scientific advisory board and from the trial investigators to further optimize the procedure, enhance enrollment and improve safety. During this time, enrollment was paused to obtain approval from the local IRBs. Enrollment in ATHENA 1 is now proceeding at 7 trial centers and we anticipate top line 6-month data in the second half of 2014. ATHENA II is scheduled to begin enrolling patients during the first quarter of 2014, with full enrollment by the end of the year. Initiation of the U.S. pivotal trial is planned for 2015. Turning to our BARDA contract. Last year, we established a contract with BARDA, a division of the U.S. Department of Health and Human Services. This contract may provide up to $106 million to fully fund the regulatory and clinical trials required by the FDA to gain approval for Cytori Celution System for the treatment of thermal burns. We believe we now have enough data across all 3 objectives of the first phase of the contract to qualify Cytori for the next larger phase. We recently met with our counterparts at BARDA to share the data. And based on that meeting, we have agreed that the next step is to schedule an in-process review meeting for early 2014. This IPR meeting, BARDA will evaluate our progress and make a decision on awarding us additional funding in the 2014 calendar year for further product development and clinical trials. The second phase of the BARDA contract is worth up to an additional $56 million in funding over approximately a 3-year period, which we expect will start in 2014. Looking ahead, we have several important milestones including: achieving the proof-of-concept milestones in the BARDA contract and qualifying for up to $56 million in additional development funding; completing enrollment in the ATHENA I and ATHENA II trials; reporting the 6-month outcomes from the ATHENA I trial; publishing the 18-month outcomes from the PRECISE European chronic ischemic heart failure trial; obtaining product registration for the Celution System in China and revenue growth in 2014 based on a number of factors, which include our new partnership with Lorem Vascular, our expanding regulatory approvals around the world, new commercial initiatives in Europe and in emerging markets; and as a result of the national prioritization of regenerative medicine in Japan. So in closing, during the last few quarters, we have significantly strengthened the company by delivering a strategic partnership with Lorem Vascular, divesting the Puregraft assets and refinancing our debt. We've expanded our regulatory approvals at Australia, New Zealand and Singapore. We've added 9 new issued and allowed patents to our comprehensive portfolio and we're delivering on our financial commitments and reiterating our revenue guidance for the full year. And importantly, we're making strong progress under our BARDA contract and we are confident we will successfully move into the second phase of that contract on schedule in 2014. Now I'd like to take this opportunity to take any questions you have for me or for my leadership team. Jackie, please open the call for questions.

[Operator Instructions] Our first question comes from the line of Kaey Nakae with Ascendiant Capital.

This question is about ATHENA I. Given the partial enrollment, how many patients are now enrolled, number 1? And then you mentioned some discussions you had in terms of trying to improve enrollment, can you talk about those?

It's Mark. We haven't changed since the last call, 16 patients. The issues with the protocol is really based on trying to facilitate enrollment. At the same time, we're trying to improve enrollment for ATHENA I. We're working out the details of ATHENA II and we felt like there were some positives from ATHENA II that we could go back and incorporate with ATHENA I. And behind the scenes, we're really thinking about pivotal, because ultimately it's how can we get the pivotal done as quickly as we can and get to approval. So as Chris said, we're up with 7 out of 8 centers have IRB approval. I've reviewed the case schedule for November and the backlog. And given the number of sites that are up and running, I don't think we've ever had this many sites up and running all at once. I think we're in good shape to get ATHENA I done as fast as possible, but also make it a strong a trial as possible, and then go in parallel directly into ATHENA II, perhaps enrolling the first ATHENA II patients in -- early in the quarter, maybe even in January. So ultimately, the goal being is to -- not so much about ATHENA I, although data, giving that out there is critical. We don't want to delay a pivotal and we want to get to approval as quickly as we can and these amendments to the protocols, I think, do that.

And with respect to Athena I, if you're incorporating some ideas from Athena II, is that simply additional measurements you're going to be taking or anything you can provide there to provide any more clarity?

Yes, I mean it's a few big things and a number of small things that we aggregated in this. I think this is version E of the protocol. Late last summer and then going into the fall, we talked to Scientific Advisory Board. We had both the European and U.S. Scientific Advisory Board talk to our investigators. We spent more time with the sites here in the U.S. It's stated very differently than the ones in Europe where we conducted the PRECISE trial. We felt like there were some things we could do to streamline enrollment. One of which, and importantly, is how to determine reversibility of ischemia, and we had some methodologies in Athena I that we thought we could simplify in Athena II, and we decided to roll those in because we think it streamlines the throughput of patients from screening into the treatment. That was a critical one. There isn't a single great task for reversibility, as you may know. There are a few safety enhancements around hemoglobin and anti-arrhythmics and so forth but if you take them all together, think it really helps make Athena I and II comparable, except for the dose, when the go talk to FDA and get the pivotal. So in aggregate, I think it's a wise thing to do, and probably ultimately won't delay Athena I or time to pivotal.

Okay, and just 1 additional question about BARDA. So if you have the meeting scheduled early in Q1, can you walk us through the protocol. If you have that meeting to present all your data, what logistically is a reasonable time frame for them to get back to you with the decision about whether you're allowed to move forward into a Phase II?

Yes, my understanding is we -- and haven't been through this exact sort of this far down the road with the BARDA before, but we get the meeting scheduled, we get a pretty immediate decision about kind of thumbs up or thumbs down. It's not just BARDA, it's CDC and some other groups, NIH, they're all at the table. There are pre-discussions going on with them now, so they aren't caught cold by the -- they know what's going on. And then if there's a thumbs up or thumbs down, then we'll be granted a certain amount of money. There's a lot of work that goes on leading up to this meeting, within the context of this additional $101 million. So this framework provides for a lot of leeway within that. And then once a decision's made, our understanding is government shut down, sequester, all that sort of -- it's hard to predict, but in about 60 days, we get some funding. So we're feeling pretty good about it and if the BARDA funding is one part of that -- but this will help -- this IPR approval, if we get it, will substantially from a path to clinical in the U.S. beyond just our cardiac, so it is important in that way. And then it helps tee up the government potentially, as a customer downstream. So this is a critical meeting and we think we're positioned well to make it successful.

Our next question comes from the line of Jason Kolbert from Maxim Group.

Can we talk just a little bit about Lorem and about Japan? Earlier this week, there was legislation passed in Japan but I saw that the legislation actually mentions IPS cells, and so I'd just like to get your read on that? And of course, the elephant in the room in the last 2 days is the Lorem partnership, can you help me understand what their R&D commitment is to funding and what indications they're likely to pursue and how the new co. or the JV that's going to be established between you and Lorem will proceed in terms of developing the markets and particularly in China and Hong Kong, Taiwan and Australia?

Jason, it's Marc Hedrick. Chris is better suited to answer the Lorem Vascular question, but I'm the Japan civics expert. So just for -- to roundup the question, so yes, the Prime Minister of Japan, Abe and a significant number of important legislators have decided to make regenerative medicine a societal priority and potentially make a big investment in regenerative medicine as part of their -- Japan's long-term growth strategy. So they passed the law back in the spring. They kind of set in motion a series of other things that whose next step as you mentioned, is 2 laws they're depending in front of the Japanese diet. One law is it's geared towards MHLW, their Ministry of Health, Labor and Welfare, which enacts a tiered regulatory system. And this is really to your question about IPS cells, that they can risk adjust Cell Therapies and regenerative medicine therapies based on the relative safety risk. It really doesn't have a lot to do with efficacy, it's more about safety. So IPS would be an example, embryonic stem cells examples of higher risk technology. So we'd likely have a higher safety bar to meet before they could be used clinically. There's a second law that's for the Japanese pharmaceutical law, which really defines what regenerative medicine means and importantly, for the field, defines what is translated as an early approval system, which basically means that once a doctor or a company or whatever takes their technology, satisfies safety requirements then they can market the technology but without reimbursement and reimbursement would be gained through a post market surveillance study. So the last step to get through if it stays in the market but without specific societal funding and allows that to come later in the form of post marketing. So I think if you've reached an IPS, I think that will be a more rigorously regulated technology, slower to get to the safety barriers. And I think on the other end of spectrum, you'll find us, which if you look through there, the translated materials and the law, things that we've receive directly from the agencies, we think we're going to be one of the lower categories and one of the quicker things to market, partially because we have so much practical experience in Japan. It's a long answer but I hope that...

Well, no, that validates, because when I saw a piece of legislation and went through the translation, all those -- the legislation that came across Monday clearly was targeting the IPS side and we're all awaiting the legislation on the regen side. It's good to know that we're on the same page there. So maybe we could now transition and just talk a little bit about Lorem and what their strategic commitment is to R&D and how they're going to develop and target indications in those particular geographies?

It's Chris. So Lorem Vascular is predominantly a sales and marketing company. So their focus is going to be more on market development in these regions than doing more of the classical R&D or clinical work. But within that market development umbrella, we've been building some registry programs, some in cardiovascular, some in some other areas that we will begin to introduce actually, this quarter and then into next year. And they will bring in some of those registry programs into their markets that help, not only get some initial sites up and running, they can then train additional sites within the region, but generate local data and local utility that can be then used to help drive more specific claims reimbursement and so forth, similar to what we're doing in Europe. So I would say Lorem Vascular is predominantly going to be focused on the market development side in getting this technology into those markets. And so today, we already have approval in Singapore, in Australia and Hong Kong and those are markets that they're initially launching in. So there's an upfront order of a couple million dollars worth of products and those will be focused in receiving those initial markets. In parallel we're...

I think it is really important if you can take a minute and expand upon what you mean when you say you already have approval in those markets and how we should differentiate that approval versus the clinical approval and a specific indication.

Yes, this is -- I mean, the clinical regulatory roadmap for us has been consistent in all places around the world. So we've started with predominately, tool claims, so these are devices that process patient cells at the point-of-care for reinfusion or for reimplantation back into the same patient. And these are typically Class I type claims. And then we build on that to add more specific or more therapeutic-oriented claims along the way. So in Europe, we started with the -- this very broad claim of point-of-care Cell Therapy tool claim and then we've added multiple times, additional more narrow, more therapeutic specific claims. So the approvals in Australia and in Singapore echo those same approaches and we'll continue to add additional approvals, more specific, narrow indications, let's say, moving forward. I expect the same thing will happen in China. We're working with the China FDA, we've had multiple meetings. There's more meetings coming up and we're guiding an approval there in 2014 based on these ongoing active work we're doing with the Chinese FDA. And it will be a similar approach where we get the tool claims and then we build on that to enrich in those indications for used claims that will be added with additional data. Does that help Jason?

Yes, it does.

Our next question comes from line of John Putnam with Wedbush Securities.

Chris, I was wondering, it's my understanding that Lorem is a new company, a new start up and I guess what I'm wondering is how confident are you that they can build the infrastructure to be able to blast through these markets, which are obviously, potentially very large?

Yes, important question and I've been working with Mr. Lim for probably 6 months on this transaction and my team's been working with him for about 18 months. So we've gone through an extensive amount of due diligence both ways, spent a lot of time with him in Asia and he spent a tremendous amount of time looking at the technology. So there's a number of reasons why I'm confident in Mr. Lim's ability here to be successful. The first is foundationally, Mr. Lim is a highly successful entrepreneur and a shrewd investor. So he's already established that. So he's a well-established kind of public track record of success in his background. For example, he founded the Access Real Estate Investment Trust that's a $0.5 billion REIT in Malaysia. He successfully developed commercial properties all across that whole region. Today, he's developing the Rockbank project that's one of the largest land development projects in Australia and this is a massive project. It's 7,000 homes, plus schools, plus a hospital, a commercial town center. The total gross development value of his project is over $5 billion. So you're talking about an entrepreneur here that's been very, very successful. And within that is a guy that brings in the right team, makes the right investments, has the right relationships politically and so forth, to get stuff done. The other reason is that I have confidence in Mr. Lim because he's investing personally into the technology. So through the partnership, he's committed to becoming Cytori's single largest shareholder and he will join our Cytori Board. That's an addition to the money he's investing directly into Lorem Vascular and he's committed to providing his personal leadership to, not only recruit the right talent, but establish the right partnerships and the resources and resource that company appropriately so that it will be able to execute on its established business plan. And finally, in working with Mr. Lim and now getting into his network, I can tell you that he brings an extensive personal network in these regions. Everything from the top hospital systems and hospital centers, political relationships, potential partners. So in summary, I met with their team, I've reviewed their plan, they're currently talking with the right commercial partners to work within these markets. So when you're looking at China or Australia or Singapore, he's already deep in discussions with some of the right groups to bring this technology out. And we've worked with him with the Chinese FDA through his relationships as well. So I believe that Lorem is going to have the resources, they've got the commitment and they've got the connections really, to be successful in executing this plan.

One other question. Your fourth quarter estimate of revenues, does that include the $2 million that they will account for in the quarter or would that be an addition?

Our funnel is pretty deep right now. We've got a very full funnel. You never know how all that pans out. It always look strong going into the quarter and then as you get closer and you've got people to sign on the dotted line, we'll see how that pulls through. But right now, the quarter's looking very strong and we expect to beat our number, at least make our number.

Our next question comes from line of Jim Fitzpatrick with Princeton Capital.

You have answered just now, most of my questions. Tell us something about the genesis of coming together with the "new company" Lorem Vascular. Did it start with him or with you or with a third-party? And the other question I would ask, what is the percentage ownership in the JV and what is the -- are there any other -- the person just now asked about infrastructure, are there any operating facilities in Lorem Vascular now or soon to be?

It's Chris again. So I don't know if you've read the book The Innovator's Dilemma by Clayton Christensen but it talks about what it takes to be an innovator of disruptive technology or disruptive innovation. And one of the core thesis in that book is that when you're innovating something that's fundamentally different, that's fundamentally disruptive, you need to be creative and innovative, let's say, with your approach to everything, whether it's channel or financing and so forth. And I think that for us, for Cytori, as well as really, more broadly, for the Cell Therapy field, we're innovating a new field in medicine that doesn't exist today and we've advanced it to where we are now. But there's this gap between kind of the traditional partnerships or large medical device partnerships and where the technology is. And what we've been able to find is an innovative way to bridge that by bringing in visionary people like Mr. Lim to take this technology and bring it into the market. And so, it's kind of been an opportunity that we found each other in some ways. We were -- we've been out looking for a number of years, for the right partners to bring this technology. Obviously, talking to all of the traditional large pharma, large medical device companies, but we've also been looking for innovative ways to find people that are dedicated, maybe operating on a more local level, that are resourced and experienced, that they could bring technology like this and really get it adopted into the market. So I think that we've kind of found each other. We've spend the last 18 months putting this thing together and all of the complexity of what it takes to do a deal of this magnitude. On the percent ownership side, this is not a joint venture in this case. It's more of a license to a -- more of a partnership with a license element. So we don't own any percent of Lorem Vascular. It's more the license driving the relationship there. And then from an operating point of view, there are existing facilities that they have in Melbourne and in Kuala Lumpur and in Beijing. And Hong Kong, they've already got some space in these places. They've got a large facility now in Beijing that we're actually going to be touring and meeting the team that they've got in place there this weekend. So we're really pulling all of the things together with them and they're going to hit the ground running as soon as Monday. I mean, they're really are already actively putting all this in place. So this has been a work in progress for many months and there's been a tremendous amount of behind-the-scenes effort to get it to where we are today.

Money has been put in as grow -- or the realization of some of the aspects that you're planning on or...

Sure, sure we've actually received the first $12 million in from the first part of the agreement due in November, so that's been received. And we have proof of funding and everything else on the rest of the contractual obligation. So yes, we're in good shape on all the financial diligence.

As Mr. Lim signed on to those commitments himself or who is the guarantor of those commitments? Because Lorem is licensed -- Lorem has no shoulders, you might say, or deep pockets?

Yes, absolutely. He signed on.

He signed on. So, okay. Well I like the deal. The deal sounds appropriate. In fact, we've been buying additional shares since your managed -- announced it but -- so you don't have to sell me on it, I appreciate the way you've answered questions.

Our next question comes from the line of Steve Brozak, WBB securities.

Going back to what you've just been able to accomplish and how it now puts you into position to be able to execute with BARDA, can you go over what you would expect? And obviously, you're not sure until you actually finish with BARDA, but what you would expect to have in your relationship with the U.S. government that would allow you to leverage your product in the U.S. markets. And I've got a follow-up after that.

The BARDA relationship gives us several things that are in place today and a foundation to build for the future. I think the thing that gets us today is capital to develop the next-generation of the system. We can expand our preclinical research, our basic science research and it gives the -- [indiscernible] of the U.S. government, good or bad as that may be onto our technology. It also creates intra-governmental relationships, groups that are sitting at a table like NIH, NIAID, CDC and so forth, becoming increasingly more aware what we're doing, even the Department of Defense is there and has interest in it and the technology and what we're doing. So those are all things that are existing today. If we can successfully go to the next step within this larger $100 million plus framework, then it opens up another path to market. Cardiac is a home run opportunity. It's the golden goose of Cell Therapy, but burn injury, wound healing, ischemic ulcers, all sort of fall out of what we're doing clinically with BARDA and their funding provide a funded path to market for that. So that's critical. So new device, new path to clinical and then the government's not doing this to help Cytori, they're doing this to provide the U.S. population with the medical countermeasure to what they see is a critical unmet need in our country, which is how to treat 10,000 burn patients with radiation all at once. And so, there's a chance that if we're successful, even prior -- as I said before, prior to FDA approval, they may acquire the technology, put it in place and have it available if the worst were to happen. So this works in a lot of different ways for us and we're really doing everything we can to make sure this project is done on time or ahead of time. And if successful, we can meet the full spectrum of funding available to us, if not expanded.

Actually, that just took me into the next question. In terms of the regulatory body, FDA, can you give us a little bit of insight in terms of obviously, how your relationship with them is improved because obviously, the U.S. government wouldn't be looking at something unless they have confidence that it could get through FDA. And the second part of that is between now and your announcement, will you be announcing any other data or are you looking at anything that you would be able to give us greater color granularity? And I'll hop back into the queue after that.

The question about FDA is easy. We have a great relationship with FDA. Our team, members of our team are in Washington, sitting close to them monthly about various issues with BARDA or a pivotal trial or cardiovascular trials, potentially new opportunities. Once we clarify the regulatory pathway with the FDA, we've done everything we can, and as have they, to make sure we have the best possible working relationship. In fact, almost every meeting we have with the FDA now is with the same group of people. So we're building a nice, corroborative, working relationship and we think they really want this technology to move forward in the market. And then Steve, I'm sorry, your second question?

Actually, I'll switch it slightly. So without putting words in your mouth, given this current transaction that you were just able to work with, now you have the runway you need to go out there and meet the milestones that you believe are achievable either on a specific basis or prior to. So what you're looking at now is a situation where you've secured your short and intermediate future, is that a good assessment?

Yes, as long as you're right, you can put words into my mouth. So yes, I agree. I think this is -- this most recent transaction really helps get us through next year through these next milestones with BARDA in the funding that's going to be a huge benefit to us if we're successful and I think it will provide other opportunities that some of which we're working on now, some of which we probably haven't fully anticipated.

[Operator Instructions] Our next question comes from the line of Greg Houston with Oppenheimer.

I'm going all the way back to the question that Jason started with and a lot of others since have asked. I'm trying to get my arms around the Lorem commitment. I mean, in addition to having the money, which was obviously important for you, their plan of attack had to be something that you've spent a great deal of time looking at. And I'm wondering if you have a sense of what the financial commitment is to create a medical device company. I'm sure many of the other partners that you -- or prospective partners that you've considered or talked to, they have boots on the ground, they have regulatory people, they've got people who are making calls, et cetera. Can you give us a sense of what that commitment looks like in terms of dollars and/or people? And secondly, could you clarify the $50 million hurdle to get further income from this relationship?

Absolutely. It's Chris. So on the first question, we've spent quite a bit of time working with them on their plan, understanding their model and their investment into the company and how they plan to expand across the region. And so, we've looked at that in detail. I can tell you -- I can't give you the exact numbers of what they're gone invest in it, because as a private company, they don't want to put that out for various reasons, competitive reasons and so forth. But I can tell you they're committed to funding it and resourcing it to execute the plan that we've looked at together with them. And the plan that we've described a little bit in the opening statements, that they view this as a -- up to an $8 billion realizable revenue opportunity for them over the next 10 years or so, is the model that they're looking at. And they're resourcing appropriately. Now, part of that will be to bring in the right commercial partners and as they do that, we will share that with you. But I can tell you, of the groups that they're talking to, these are the premier partners in specifically, Singapore, Australia and in China. So we expect that they will bring in some additional resources through partnerships to get access to those markets. But in addition, they're building their teams. And I think I mentioned earlier, I'm going to be in Beijing with them this weekend and they've got a very large new facility there that they're building out for this company, specifically and putting the team in place. We'll be meeting a number of the new team members that they're adding on and working with them, as well as with the CFDA next week to get this thing really kicked off. So I can't give you the specific numbers but I can say that they will be investing significantly into this business to make sure it's successful.

And the $50 million hurdle was in the original press release?

I knew you had a second question, I didn't remember. So the way that the license fee or commercial milestones work is they're kind of setup on thresholds. So when the aggregate revenue of Lorem Vascular hits $50 million increments, then we get a $10 million payment. So when their aggregate revenue hits $50 million, we get $10 million. When they hit another -- when they hit the $100 million, we get an additional $10 million. So this isn't reset at a calendar year and -- or anything like that. This is just aggregate over the life of the relationship. And that's capped at $500 million. So as they approach $5 billion, sorry -- or whatever the math is, 250 -- $2.5 billion in revenue, then we tap out and then -- but the more important part of the relationship is really the supply agreement. So from day 1, every product that they sell, they purchase from us under our supply agreement and that by far dwarfs the commercial milestone for this sort of royalty, if you will, on the sales. But we see sales day 1, as this business grows.

Yes, that's very helpful because that wasn't clear to me in the original press release. That's very helpful.

Thank you for your having us clarify that because that's really the most important part of the relationship is getting -- driving into these new markets that we otherwise, probably wouldn't have a lot of access to, with a dedicated partner. And we generate revenue right along with them on day 1.

Our next question comes from the line of James Anderson with Lantern Hill Capital.

Sort of following up on Mr. Houston's comments, I'm guessing since Lorem wants to buy or will immediately buy a couple of million dollars worth of equipment and product, that they are probably trying to target the same initial markets that the clinic that we know that's being built in the Bahamas. And that obviously to me seems to be the kickstarter for the same concept in the Far East, in Singapore, Hong Kong and Australia. I mean, is that a logical assumption that that's where you're going to be heading to try to establish some clinics with their marketing?

What I would -- I wouldn't connect this in any way to the Okyanos relationship. So we think Okyanos is going to be a very good customer and I spoke with them actually, this morning and I think that's a separate opportunity. But it certainly underscores the importance of the vascular market and specifically in this case, heart failure. So in as much as Okyanos is really targeting heart failure, and so will Lorem Vascular. I think that's exactly right and it's been the main focus of Cytori from day 1. We've been developing and investing in the research around heart failure for the last 10 years. So it's not a surprise I guess, that these partnerships are really looking at that as a market opportunity. And within that, I think you can also recognize that it's really one of the most significant markets for regenerative medicine. Because it's the leading killer in the Western world. It's a very, very prevalent disease. It's increasing in its incidents around the world and it represents, particularly in Asia, really one of the most devastating diseases out there. So absolutely, they're going to be targeting heart failure as their leading indication. That's not all that they're going to do but their initial focus will absolutely be in heart failure. So getting in the key, high level hospitals and clinics starting at Hong Kong and in Australia and in Singapore, and we've already been meeting with groups there with them, so this is already in process, is an absolute core part of that strategy. And I expect some of these initial systems will be in those heart failure centers and used for heart failure, absolutely.

Yes, I wasn't trying to make a connection between the two, but in terms of the no option heart failure market, it just seems so obvious between the 2 markets, so okay.

If you run the numbers out, the $8 billion, that really reflects about 4% of the heart failure market in China.

Yes, with 1.3 billion, I believe.

It's huge opportunity.

Our next question comes from line of Prashan Meta with Net Gain.

Mark, congratulations on the deal. I just want to quickly follow-up on one of the first questions that you guys got about the partnership. And once again, congratulations on the partnership. The question, actually, more of a way to get your views. As Chris mentioned that book, it's one of my favorite books also, I understand you guys need to creatively partnership finance and the rest, but my question to everybody there is what your view is, a typical partnership with a pharma might be wise. There's a certain amount of premium ascribed to the stock price which can collect tangibles. How do we collectively educate the marketplace in a partnership which is this creative? And that's one part of the question, the other is, does this exclude any typical pharma, medical device partnership down the road?

So it's Chris and I think in simplest terms, it's really about execution and I think that as Lorem executes and you see the sales funnel improve from us as we're transferring product to them and the technology adopting, that's where the credibility and the long-term value will be gained through this partnership. And I think we've got to earn that and that's going to take some time. But I'm confident that they're going to do the right things to make this and invest in this technology. In some ways for me, the commitment that they're making upfront and putting in this capital is one of the most important parts of the whole agreement with them because it ensures that they're really committed to making this successful. In terms of potential global partnerships and so forth, if that opportunity comes along, there's always ways to try and find an opportunity to make that happen. I think that a lot of the global partners that we've talked to understand that we may or may not already have some existing channels or licenses and so forth. And I think it you just work through those in the future. I don't know the necessary blocks anything.

And the final question comes from the line of David Musket with ProMed.

Can you -- and the clarification is obviously very helpful here, can you just clarify what kind of performance clause is there? Obviously, everybody's in the honeymoon stage here, we love each other, we think everybody's going to sell billions but at what point, how long downstream before we start to get metrics in which we have measurements on this?

So David, you've got the upfront commitment. So we've got a $2 million opening order that covers Hong Kong, Australia and Singapore, and then you've got a commitment that the day we receive the approval in China, that we've got another $5 million in orders coming through. And then we will, as we got into those markets, work together with them to put -- there's a whole section in the contract about forecasting and creating orders and when they become binding and so forth and how we collaborate on putting that all together. So there's definitely a collaborative element in engineered into the entire agreement. But first is to get this up and running and commercial best efforts and all of that stuff is designed into the contract. But I think as everywhere in the world, we need to get this going together with them and once we start to see that we can add rhythm to the music and we can describe it in a predictable way, then we will share that with you.

That's great. Will you be breaking out the revenues from this geography separately at any point?

Potentially. We'll have to sort of see how this goes. I mean, segment reporting becomes complicated but we want to be as descriptive and as transparent as we can. So we'll kind of see how this goes and we will let you know.

Okay. A couple more along these lines. The organization that they have, have you -- as they were putting this plan together, I mean, are these some seasoned healthcare professionals that they hired away from other established firms, because we clearly have no sense of their presence in the healthcare space?

Yes. So as I've mentioned earlier, I mean they're really -- they're investing, they're building their team. I'm not going to describe today what that -- who's on that team, but as this matures, that will become visible either through their website or through our ability to share that with you. But I can tell you, they are committed to making this successful in putting the right people in place. And so, I would expect that they're going to add the right people with the right background. So I'll give you more on that as we get it.

And you alluded to them seeking partners. What type of partners and will those be -- do you think those will end up being publicly disclosed and reported and something that we could actually track?

I expect they will. And what I mean by partners is really more channel partners. So these are kind of commercial distribution, existing, leading distribution companies in those geographies. And so, these are groups that have access to the right decision makers, the hospital's, experience in those centers. It's really channel but not just any channel, but it's really the top channels. And particularly, when we start looking at China, you can imagine the lead one is it's heavily owned by the state and they're involved in the whole vertical there. So more of that as those come together, but I think that's going to be a big part of their overall strategy and getting this technology out and leveraging existing channel to bring this technology to the market.

That's fantastic and do you think -- you do think you'll get the Chinese approval sometime next year?

Yes.

That's fantastic. Can I switch gears just for a second to Japan. That was the geography I thought we might first hear about, especially with the legislative effort, very high profile effort from a whole government to advance cell-based therapies. And yet, I don't think any of the majors have laid down any bets yet. So do you have any -- I mean, do we really need the final passage before people start to make investments there and -- or is that because it's going to take a little while to implement or how should we be thinking about that?

David, it's Marc Hedrick. I think we need to wait and be a little cautious before we, as a company, start talking about how this changes our strategy. If there's a rollout, assuming this gets approved by the -- it's approved by the lower house, assuming it gets approved by the upper house and signed off, believe it or not, by the Emperor, then there'll be a public comment period and I expect it will take about a year for the formal legislation to be enacted and then maybe some subsequent ordinances and so forth that also need to be rolled out, which will take time. From our perspective, there's stuff that we can do right away. And we think this is going to positively impact our sales in 2013, assuming it's passed. And then that will grow into 2014 and as the -- assuming that it's positive and supported for us, which we -- we're optimistic cautiously that it will be, that over 2014, we'll be able to really begin to investing based on how the MHLW and the PMDA in Japan actually craft the legislation. Picture ObamaCare, there's a lot that's approved, but then there's different layers of regulations that the bureaucratic agencies have to write. So that will be worked out over the next few months. We are actually the only American company that's on the regenerative medicine industry group. So we have a seat at the table with MHLW and the Ministry of Economic Transports as this stuff is debated and then we are -- as part of that discussion, we are planning on a go-forward basis on how to respond, but we really won't know exactly what this means probably, for a few more months into 2015 and beyond.

That's very helpful. I guess the -- my presumption before all this effort was that you already met basically, the regs to go forward there. Obviously, you have several ISPs ongoing and that's with the results of those trials kind of being announced over the next 12 months or so. I think some of them, maybe even next quarter. That might actually give you a much higher profile for -- and might push this agenda little bit more rapidly. In other words, I'm not sure why a company or a potential partner would need to wait because it doesn't look like you would not qualify under any of the guidelines that are being discussed. In fact, it looks like you've already met all those requirements.

Yes, well so -- yes so take a step back. So we have what's effectively, sort of a device-based approval that allows us to sell the system right now to hospitals and we've got the whole infrastructure in Japan to do that. The problem for us right now in Japan is that we have to -- customers that want to do studies have to go through a 6 to 12-month cycle with a group called the Stem Cell Guideline Committee. And that takes -- we have to do -- you have to do one take and then you apply for your approval, you get your approval and you can treat a certain number of patients and then you can come back and expand that. It's a very inefficient, laborious, time-consuming system. This new legislation will overturn that and then allow doctors to buy the technology and use it without going through the current laborious 1-year time frame. It may even just be a 1-day registration. So it can cut our sales cycle time from a year to a day. That could be impactful right away and that's why I'm saying it could have some immediate impact as soon as they overturn that. The second thing that you really mentioned is okay, we've got 9 or so studies going on, can we take those and convert those into approvals by either taking that data or adding a few more patients and getting formal approval and begin to market it although without reimbursement for that, and then set up post market surveillance studies based on that to then get reimbursement later? And the answer is we absolutely have that as part of our strategy and if you look at the Ministry of Economics and Transport on data, they think that this legislation will cut clinical trial cost in regenerative medicine down by 30%. We'd probably see more because we hope we're going to be on the lower tier. And then in the background, we have things that are going on irrespective of this new law, for example, as you know, we have a urology trial that's going on at multi-center led by Nagoya, which would be geared towards not just early approval but approval and reimbursement. And so, we are still moving forward on a pathway that we'll talk more about over the next quarter or two, to have our own approved and reimbursed technology for specific indications in Japan outside of whatever benefit the new law may have.

That's very helpful. As I've said, I've been thoroughly impressed with the infrastructure and the strategy in Japan. It just seems like it's just a matter of time before this turns into a major opportunity for you.

Yes, I think all the hard work and investment we've placed in Japan is, fingers crossed, god willing, would pay off pretty soon.

[Operator Instructions] We do have a follow-up question from the line of Jim Fitzpatrick with Princeton Capital.

Just 2 quick questions on Lorem Vascular. We're hearing it as being geographically specific. Is it geographically constrained? Might it be applied in the western hemisphere or in Europe? And the other question is how soon will we be able to receive from the SEC, the terms of the agreement you've just worked out?

Jim, in the first question, they've licensed effectively; China, which includes Macau and Hong Kong, does not include Taiwan; and Australia; Singapore and Malaysia, so those 4 countries essentially. And that's their geography right now. Now, there's nothing to say in the future that they can't come along and want to expand that. They may have an interest but today, really, their appetite and their vision is to focus on those specific 4 countries. And I think Mark has just checked on the answer to your second question, so I'm going to turn it over to him.

Hey, Jim, the contract will be filed with the K.

It's already filed?

No, sir, the contract would be filed with the 10-K.

When will that be available?

That will be -- the 10-K would be by the year end document, which would come out in February.

In February, okay. Well, I must admire your team and your attitude and your culture and all your accomplishments. Good wishes.

That was our final question. So I'd now like to turn the floor back over to Chris Calhoun for any additional or closing remarks.

Great. I want to thank you. A lot of great questions today and a lot of good discussion. As you can tell, there's a lot going on but we're executing on our plan and on our vision. So we look forward to following through in the fourth quarter. We're going to close out 2013 successfully and a continued position of strength in moving into 2014. Thank you, all for your time and for your ongoing support of Cytori.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.