MBOT - NASDAQ

Martin M. McGlynn - Chief Executive Officer, President, Director, Member of Strategic Transactions Committee, Chief Executive Officer of StemCells California Inc and President of StemCells California Inc Rodney K. B. Young - Chief Financial Officer and Vice President of Finance & Administration Eliseo Oreste Salinas - Head of Research and Development and Executive Vice President

Stephen M. Dunn - LifeTech Capital, Research Division

Good day, ladies and gentlemen, and welcome to the StemCells, Inc. Q2 2013 Earnings Conference Call. My name is Bree, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Martin McGlynn, President and CEO. Please proceed Sir.

Thank you, Bree. Welcome, everybody, and thank you for joining us today. So on the call today, Rodney Young, who's our Chief Financial Officer, will present our financial results for the second quarter of 2013. Following that, Eliseo Salinas, our Executive Vice President and Head of Research and Development, will make a brief presentation on the 2-year PMD data that was announced last Friday, as well as provide an update on the very exciting translational activities that are underway at the company. And then after that, we'll open up the lines for a question-and-answer period. So over to you, Rodney.

Thank you, Martin. Before we proceed, I would like to remind everyone that during today's call, we will be making some forward-looking statements, which reflect our current views and are based upon certain assumptions that may or may not ultimately prove valid. We assume no obligation to update these forward-looking statements anytime in the future, and our actual results may differ materially from anything projected during today's call due to risks and uncertainties to which we are subject. These risks and uncertainties are described in our public filings with the SEC and at the end of our earnings release, which you are encouraged to consult. We just issued our earnings release a little while ago so let me take you through our financial results. So starting with the top line. Total revenue in Q2 of 2013 was $282,000 compared to $249,000 in the second quarter of 2012. Our SC Proven sales totaled $250,000, which was an 18% increase compared to the $211,000 we reported in the prior period of last year. Q3 sales are actually off to a very good start with a very strong July. On the expense side, operating expenses increased by $891,000 or 16% in the second quarter of 2013. They totaled $6.4 million compared to $5.5 million in the second quarter of 2012. All of this increase was due to increased R&D expenses, as we focused our activities to accelerate our clinical development agenda, and increased spending on preclinical research with our HuCNS-SC cells. R&D expenses were up just over $1 million in the second quarter of 2013 compared to the prior period of 2012, while SG&A expenses actually declined $194,000 or 11% in the second quarter compared to Q2 of last year. So our loss from operations increased in the second quarter of 2013 to $6.2 million, compared to $5.3 million in the second quarter of 2012. So now turning to items below the operating line. We reported other income of $758,000 due to a decline in the fair value of our warrant liability. This compares to $6.2 million in other expense from an increase in the warrant liability in second quarter of last year. As a reminder, under warrant liability accounting, the changes in the value of the warrant liability are passed through the income statement as an income or expense, with the increase in the liability recorded as an expense and decreases in the liability recorded as income. But regardless of whether we show income or expense from the change in warrant liability, this is a non-cash item. Other items to note below the operating line include interest expense of $393,000 in the second quarter of 2013. This compares to $14,000 in second quarter of 2012. This increase is due to the higher debt level that we have in 2013, mainly due to our loan from Silicon Valley bank. So bottom line, in the second quarter of 2013, we reported a net loss per share of $0.15 or an aggregate net loss of $5.9 million. This compares to net income of $0.03 per share or $833,000 in the second quarter of last year. On a cash flow basis. Cash used in operating activities was $3.8 million in Q2 of 2013, which compares to $5.1 million in Q2 of 2012. For the 6 months ended on June 30, 2013, our cash used in operating activities totaled $10.4 million, which was slightly below the $10.7 million cash used in operating activities in the first half of 2012. As of June 30, 2013, our reported cash and marketable securities totaled $24.2 million. However, we announced last week that we received $3.8 million in loan proceeds from CIRM, the California Institute for Regenerative Medicine. So on a pro forma basis, we have $28 million as of June 30. So just as a reminder, in April, we entered into an agreement with CIRM for $19.3 million to help fund our IND-enabling work for Alzheimer's disease. This funding is in the form of a forgivable loan, meaning that the loan will not have to be repaid if our HuCNS-SC cells are not successful as a treatment for Alzheimer's disease. So the $3.8 million we received in July was the first disbursement under this loan agreement. So now, I'll turn the call back over to Martin.

Thanks, Rodney. So as we've shown over the past few quarters, the data emerging from our clinical trials is encouraging and continues to build our confidence in our human neural stem cell clinical development program. Obviously, our operational priority now is to accelerate patient enrollment, complete the ongoing Phase I/II trials and quickly initiate Phase II proof of concept trials. Much of our effort in the second quarter was dedicated to these objectives and we made some very significant progress. So I'd like to introduce Eliseo Salinas, our Executive Vice President and Head of Research and Development, who will talk today about our ongoing clinical development program. Eliseo joined StemCells, Inc. in June of this year and brings with him extensive experience and expertise in drug development, particularly in CNS, and a proven track record in getting products to market. Prior to joining StemCells, Eliseo was Executive Vice President and Chief Medical Officer of Elan Pharmaceuticals; Senior Vice President and Chief Medical Officer of Adolor Corporation; and Executive Vice President and Chief Scientific Officer at Shire. So over to you, Eliseo.

Thank you, Martin. Good afternoon. I would like to take you through a few slides. Last Friday, Dr. Stephen Huhn, our VP of CNS Clinical Research, presented additional data from our long-term follow-up study in PMD that confirms and strengthens the conclusion from the 1-year data we reported last fall. As a reminder, summarizing the slide, our Phase I results, which were published, as I said, in October showed evidence of progressive and durable donor-derived myelination in all 4 patients transplanted with the cells. In addition, we saw gains in motor and/or cavity function in 3 of the 4 patients -- of the forward patient remained clinically stable. Now, 2 years after the transplantation with the cells, the data showed that the MRI evidence of myelination is more pronounced compared to the 1-year post-transplantation. And the gains in neurological function reported in our Phase I study 1 year of transplantation were maintained with no new or emerging safety concern. Now given the generative nature of PMD, those neurological changes and MRI changes measured at time points long after transplantations with the cells suggests a departure from the natural history of the disease. As most of you probably remember, there's a compelling preclinical rational for the use of the cells in PMD. Based on the demonstration of de novo myelination in the hypo myelinated shiverer mouse with the MRI and electronic microscopy demonstration of physiological myelin produced by newly formed human oligodendrocytes. As you know, we injected cells in those children in 4 locations in the frontal lobes, 2 in each hemisphere indicated in this slide by the blue dots. Adjacent to the corticospinal tract, a key conduction area for locomotor function. We published last October the result of the trial, in particular, the MRI data assessing myelination. We measured with VTI the -- sorry, got ahead of ourselves with this slide. We measured with DTI changes in the transplanted areas indicative of myelination. Here in the slide, you see again the transplanted areas in blue, there were 4 of them. And we compared the evolution of the DTI signal before and after transplant. More importantly, we also assessed with the same MRI technique other areas located at a distance from the transplanted areas to serve as an internal control of the natural progression of the disease in the same patients. We have a problem with this slide. We are missing one patient in this slide and I don't know why that is. Okay. So I'll talk you through this slide. In this slide, these are the 4 patients. For some magical, it's the only reason, patient #4 disappeared in the slide presentation that we had 10 minutes ago. But in red, you have the transplanted areas for each of the 4 patients. The first 12 months to the first part of the curve, the left part of the curves correspond to what was published last October. So the new data is the second part of the curve from 12 to 24 months. What we see is that biologically, the transplanted areas in the same brain of those patients behaved differently from the control areas, showing that there is biological activity in the transplanted areas that is different from what's going on in the rest of the brain at a distance from those areas. Please note that the scale on the 3 slides that you can see and the fourth that you can't see, are different. Some going up to 14% and some going to 25% or 40%. But in 3 of the 4 patients, #2, #3 and #4, that unfortunately you can't see, at the end of the 2-year observation period, you see a difference of 8 percentage points in the transplanted areas versus the non-transplanted area. This curves represent what is called fractional and isotropy, which represents the preferential movement of what are protons in one direction of, let's say, constrained by the surrounding myelinated actions. 8%, to give you an idea, when compared the natural evolution of myelination using normal children and adolescents beyond the age of 2, it's bigger. It's the same magnitude or bigger than what you expect to see over 1 year of age at the time points of the steepest increase in myelin. Patient #1 is the one that you see sort of smaller changes. However, for this patient, we do have already year 3 data. So 1 year more than what you see in here and we observe in that patient, sort of a further separation of the transplanted areas versus the controlled areas. As we indicated previously, this is the first biological sign -- or sign of biological activity and targeted engagement of the HuCNS-SC cells, and as such was extremely encouraging a year ago, and as we are extremely pleased now seeing that 2 years later, the results are strengthening. The differences are stronger than they were 1 year ago. Next slide. Now the question is where do we go from here? Having this sign of biological activity was critical. Now we need to relate those MRI changes with clinically relevant benefit. So we plan to meet with the agency, with the FDA in the coming months to determine a viable registration pathways. Now as an update in the rest of the programs, very ambitious programs. First, to the spinal cord injury trial. As we announced previously, we amended that protocol. It's still a study that targets to enroll 12 patients with thoracic spinal cord injury. Now in the new revised [indiscernible], the first 3 patients were to be patients with a complete or ASIA A injury. The next 4 patients, 4 to 7 could be either ASIA A or ASIA B patient with an incomplete lesion. And the last 5 patients, #8 to #12, will be either As, Bs, or Cs patients with other type of incomplete lesions. This protocol has been now authorized by Swissmedic, as we articulate before and recently by Health Canada and we are working diligently to open Canadian sites. The first 3 patients, as you know, completed the 12-month trial and are enrolled in the long-term follow-up study. We have those patients #4 and 5, and with the next 2 additional patients, we will open enrollment to ASIA C patients. Our target has completed enrolling in the study in the first quarter in 2014. Turning now on to the AMD or H-related macular degeneration study. As you know, this is a very severe disease, due to the loss of photo receptors in the macular that lead to central vision loss and blindness. It's very prevalent, accounting for about 90% of all AMD cases, and there is no approved surgical or medical treatment for dry AMD. Can I have the next slide please? So the trial is -- the ongoing trial is an open label dose escalation trial intended to assess specifically, safety. We plan to enroll 16 patients in total. The first cohort include 8 patients with very low visual acuity, so less or equal to 20 out of 400, so these are very handicapped patients. The first 4 patients receive a dose of what we call a low dose of 200,000 cells and the second group of 4 patients in this third cohort will receive the higher dose of 1 million cells. When we would have enrolled these 8 patients, and if there is no safety concerns, we will move to the second cohort that will be 8 patients with better visual acuity, 20/100 or 20/200 that will receive the higher dose, which is 1 million cells. Next slide. We initiated the trial in June last year. We're currently enrolling at 2 sites, The Retina Foundation of the Southwest in Dallas and the Byers Eye Institute at Stanford here in Palo Alto. And we are working also throughout additional sites. We have enrolled already 4 patients, which complete the low dose portion of cohort 1. We target to complete the enrollment in cohort 1, which is 8 patients in total by the end of this year and complete the trial enrollment 16 patients in total in mid-2014. I'll turn it back now to Martin.

Thanks, Eliseo. So, as you can see, and we have a lot of translational activity going on in the company and delighted that Eliseo has had the opportunity to bring everybody up to speed today. I've stated this before, and I'd like to reiterate today, that we continue to believe that our best strategy is to build shareholder value by generating meaningful clinical data in a cash efficient manner. In the second quarter, we took important steps to accelerate our ongoing trials and to complete their enrollment, and to ensure that we have the expertise and the resources necessary to execute those trials. Of course, going forward, we will continue to provide interim updates on the spinal cord injury and AMD trials as the data becomes available. So with that, I'd like to thank you for your attention. And we'll open up the call for questions.

No. We have not had -- since I've been working with StemCells initially, as a consultant, since October, we haven't had discussions with the FDA regarding the path forward, but we plan to do that soon.

Well, ladies and gentlemen, it appears that we don't have any additional questions, so I will take that as a complement to the very good explanation and presentation by Eliseo and Rodney. I want to again thank you all for joining our call today and we look forward to continuously updating you when we convene again to talk about the results and progress in Q3. Thank you, all, very much.