AJ Bergmann - Chief Financial Officer Linda Marbán - President and Chief Executive Officer.

Joseph Pantginis - H.C. Wainwright & Co. Alan Leong - BioWatch News.

Welcome to Capricor Therapeutics’ Fourth Quarter and Full-Year 2017 Conference Call. My name is Jonathan and I will be your operator for today’s call. At this time, all participants are in a listen only mode. At the end of this call, we will open up the line for your questions. [Operator Instructions] Note that this call is being recorded.

I will now turn the conference call over to Capricor’s CFO, AJ Bergmann..

Thank you. Before we move further along, I would like to state that we will be making certain forward-looking statements during today’s presentation.

These statements may include statements regarding, among other things, the efficacy, safety and intended utilization of our product candidates, our future research and development plans including our anticipated conduct and timing of preclinical and clinical studies, our plans to present or report additional data, our plans regarding regulatory filings, potential regulatory developments involving our product candidates and our possible uses of existing cash and investment resources.

These forward-looking statements are based on current information, assumptions and expectations that are subject to change and involve a number of risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements.

These and other risks are described in our periodic filings made with the Securities and Exchange Commission, including our quarterly and annual reports. You are cautioned not to place undue reliance on these forward-looking statements and we disclaim any obligation to update such statements.

With that, I would like to turn the call over to Linda Marbán, CEO..

Thank you, AJ. Good afternoon and thank you for joining us for Capricor’s fourth quarter and year-end conference call. Joining me on today’s call is AJ Bergmann, our CFO. 2017 was a pivotal year for Capricor.

It was the year in which we shifted our clinical focus of CAP-1002, our allogeneic cell therapy to treating Duchenne muscular dystrophy, which I will now refer to as DMD. These are exciting days in the world of DMD therapeutic development, never had there been more opportunity for disease modifying therapies, including CAP-1002 and gene therapy.

We believe that there will be no single treatment for DMD, rather addressing the various pathogenic mechanisms, including partial dystrophin replacement and modification of the inflammatory and immunomodulatory perturbations may be important in treatment strategies.

CAP-1002 is believed to be a potent immunomodulatory agent with pro-regenerative and antiapoptotic actions. We at Capricor are excited to be part of this rising tide of opportunity for patients with DMD.

DMD has many pathological implications, but the main ones are loss of muscle functions due to the absence of dystrophin and the other is the resultant inflammation, which occurs because of the constant cycles of muscle breakdown and attempt to repair.

Evidence of the importance of the inflammatory complications of DMD are manifested by the fact that the only drug that has increased lifespan in DMD is steroids, which are profound anti-inflammatory agents.

The goal of most of the gene therapies should they be shown to be clinically effective is to increase dystrophin from zero to up to approximately 30%. Hopefully, this lofty target may be one day achieved.

This means that the pathological process may be attenuated in terms of muscle function decline, but limited dystrophin replacement may not adequately address the inflammatory components of the disease, as the majority of muscle cells will be subject to damage from their persistent dystrophin deficiency.

Gene therapy though hopeful, of course, remains unproven in DMD patients and there will be much to learn about its safety and efficacy. The partial elevation of dystrophin expression would be a wonderful step forward in correcting the dystrophin deficiency, but ultimately, the goal is for patients to preserve and improve muscle function.

Based on the mechanism of action of CAP-1002, which is known to be immunomodulatory anti-fibrotic and pro-regenerative, we believe the cells can be important tool in treating the inflammation and the loss of muscle function caused by DMD. To that end, we began working on DMD preclinically approximately five years at launch.

Let me explain how we think CAP-1002 works in Duchenne.

First, as I said, it is immunomodulatory, which means that has been shown to reduce the sequela of inflammation evidenced by reduction in oxidative stress and pro-inflammatory cytokines, while promoting activation of anti-inflammatory cytokines, such as IL-10, which enables muscle repair and growth.

This modulatory activity has been shown preclinically to allow for new muscle cell generation and enhanced performance, while also preserving cellular energy generation as evidenced by measurements of mitochondria structure and function. The mitochondria are the power generators of the cell and are vital to maintaining normal muscle function.

This data, which explains and supports the mechanism of action of the cells in DMD was recently published in stem cell reports, with the full paper available on our website. This data served at the preclinical foundation of our first clinical study in DMD called HOPE-Duchenne.

As you may recall, HOPE-Duchenne was a Phase I/II clinical trial in patients that were 12 years of age and older. It was a randomized open-label study of 25 patients. 13 patients received CAP-1002 in a single dose of 75 million cells delivered into the coronary arteries of the heart.

12 patients were randomized to standard of care and were followed concurrently. All the patients had to be on steroids for, at least, six months prior to entering the trial and were maintained on a stable dose throughout the course of the study.

In order to recruit patients with advanced heart disease, we naturally enrolled those that were older and in the later stages of the disease process. Therefore, most of them were wheelchair dependent.

The trial was, of course, to determine if the cells to be delivered safely in DMD patients, where we added multiple measures of efficacy as pre-specified secondary endpoints. We use MRI to study cardiac structure and functions and a variety of performance measures to evaluate skeletal muscle function.

The results from HOPE-Duchenne were very encouraging. First, the data showed improvements in cardiac score – scar and a correlate measure of cardiac function in systolic wall thickening with the greatest improvements in the areas most impacted by the scar caused by DMD. Second, and this was predicted by our preclinical work.

We saw improvements in skeletal muscle functions using a validated measure called the performance of the upper-limb or PUL. Patients that were treated had better functionality in their arms and hands, compared to those that received standard of care.

Let me point out that the patients in HOPE after the cell therapy was designed to treat their heart disease only. So they were not anticipating or predicting that they will have improvements in skeletal muscle functions.

While this data is preliminary, it’s certainly provided us with energy and [Technical Difficulty] to move to the next stage of clinical development. Interim six months data from HOPE-Duchenne was presented at the World Muscle Society last October and the 12 months data was presented at the meeting of the American Heart Association last November.

From a regulatory standpoint, things are looking encouraging as well. We have already been granted orphan drug designation by the FDA and have qualified for a rare pediatric disease coupon. We were also able to obtain the RMAT designation from the FDA. RMAT stands for Regenerative Medicine Advanced Therapy.

And having this designation will allow Capricor verified and direct access to FDA, as we work towards registration of CAP-1002 for DMD. Let me tell you a little bit about what the RMAT means. It is analogous to breakthrough designation, but narrows the funnel to those eligible for cell therapy.

Specifically, the FDA grants this designation to regenerative medicine therapies as part of the 21st century Cures Act intended to treat a serious condition for which preliminary clinical evidence indicates the potential to address unmet medical needs for that condition.

The RMAT designation makes therapies eligible with the same actions to expedite the development and review of a marketing application that are available to drugs that receive breakthrough therapy designation, including increased meeting opportunities, early interactions to discuss any potential surrogate or intermediate endpoints and the potential to support accelerated approval.

We are already utilizing RMAT to our advantage and have an active dialogue going on with the FDA on HOPE-2, which is the name for our next planned clinical trial in DMD.

Because DMD is a rare and fatal disease, the RMAT designation and the apparent safety of our product in previous clinical trials, we believe that if we are able to show the CAP-1002 as efficacious for the indication, HOPE-2 to potentially be regarded as a registration trial.

In late 2017, we announced that we have IND clearance from the FDA to start the HOPE-2 clinical study, which is a randomized, double-blind, placebo-controlled trial in up to 84 patients.

Based on new preclinical work that shows similar results whether the cells are delivered into the heart or through intravenous delivery in HOPE-2, CAP-1002 or placebo will be delivered by a simple IV infusion four times per year, so every three months.

And the dose of CAP-1002 will be 150 million cells, double the dose that was used in the HOPE-Duchenne trial. The reason for the increased dose is again, in the preclinical work. We showed an enhanced response, especially in the skeletal muscle functions with higher doses of cells.

And now that we are not constrained by the limitations of coronary vascular delivery, we are able to push the dose of cells higher in order to potentially drive efficacy. Finally, the primary efficacy endpoints will be measured after one year.

We will begin enrolling patients into this trial very soon and we anticipate being fully up and running with up to approximately 10 to 15 sites by summer times. The primary efficacy endpoint in HOPE-2 will be in mid-level PUL. This is the measurements of the functional activity of the elbow and arm.

It is very important for maintaining independence, because it allows the boys to use the joysticks on their wheelchairs, as well as see themselves and utilize their arms for other purposes. We are delighted with the possibility that this outcome measures could be used for approval and may not just be considered as a surrogate.

This could create a tremendous opportunity for Capricor and for patients with DMD. We are cognizant of the fact that we are the only therapeutic and clinical testing that has shown a reduction in the scarring of the heart with concordance improvements in cardiac function.

If we achieve our goal promised by HOPE-2 as improving cardiac and skeletal muscle function then we potentially could have a product that can improve the quantity and the quality of life for patients with DMD by treating the symptoms of the disease.

Furthermore, I would like to remind you that this is one of the few initiatives treating the later stage patients, who are now, I guess, in many ways to later stage cancer patients and that they have exhausted all the options of the currently available therapies and on a steady downward trajectory.

Therefore, there is an urgency to bring options to these patients and CAP-1002 is one of the few that could potentially do that. If we are successful in showing efficacy in HOPE-2, we believe that our targeting of these older, more advanced patients will further support our opportunity for registration.

As we spend more time with the DMD community of scientists, doctors and patients, we become more aware of the synergies of CAP-1002 and the other therapies under consideration in DMD. To this end, we hosted a Key Opinion Leader Day on Friday March 9 in New York City.

The focus of the meeting was on the of evolving therapeutic options and functional measurement techniques most useful to assess change in DMD. The KOLs provided a comprehensive update on the field. The full webcast and supporting slide deck is available on our website at capricor.com for anyone who has not had a chance to listen to us.

The takeaway from this meeting with the DMD is a chronic degenerative disease and it is likely that other dystrophin modifying treatments, as well as immunomodulation will play an important role in future therapeutic paradigms.

We believe the CAP-1002 has the potential both for standalone treatments and as other therapies evolved potentially to be used as part of disease modifying therapy. Of course, percolating in the background is our exosome or easy program called CAP-2003. CAP-2003, our extracellular vesicles produced by ourselves CAP-1002.

They have been identified as the mechanism of action to cells and are believed to modify protein expression and cellular behavior leading to the profound immunomodulatory, anti-fibrotic and pro-regenerative properties of the cell.

We have spent the last several years working on these nanometer size vesicles preclinically and on later stages of selecting appropriate indications in which to deploy them. We expect to provide more color on this program as 2018 progresses.

With that, I end up – and my scientific update and I will – and clinical developments and turn it over to AJ for an update on the financials.

AJ?.

Thank you, Linda. This afternoon’s press release provided a summary of our fourth quarter and full-year 2017 financials on a GAAP basis. You may also refer to our annual report on Form 10-K, which we expect to become available in the next several days ad will be accessible on the SEC website, as well as the financial section of our company website.

As of December 31, 2017, the company’s cash, cash equivalents and marketable securities totaled approximately $14.1 million, compared to approximately $16.2 million on December 31, 2016.

Based on our current plans and projections, Capricor expects its cash, cash equivalents and marketable securities will fund its research and development programs and other operations through the fourth quarter of 2018. In the fourth quarter of 2017, our net cash used in operating activities was approximately $2.7 million.

Excluding stock-based compensation, our research and development expense was approximately $2.4 million in 4Q 2017, compared to $2.5 million in 4Q 2016. Again, excluding stock-based compensation, our general and administrative expense was approximately $900,000 in both the fourth quarter of 2017 and 2016.

Additionally, in the fourth quarter of 2017, the company notified CIRM of its election permitted under the loan agreement to abandon the ALLSTAR CIRM-funded project and entered into an amendment, whereby the total loan balance, including principal and accrued interest, which totaled approximately $15.7 million was forgiven by CIRM, thereby terminating the company’s obligation to repay this amount.

As a result of this classification, the company reported net income of approximately $12.3 million for the quarter ended December 31, 2017 and stockholders’ equity as of December 31, 2017 is approximately $11.2 million. And with that, I will now turn the call back over to Linda for her final remarks..

Thank you, AJ. Over the next few weeks, we will be presenting at several conferences. On March 21, we will be presenting at the Oppenheimer and Company Banking Conference at The Westin Grand Central in New York City.

And then again, on March 28, we will be presenting at the Needham Banking Conference in the same location, The Westin Grand Central in New York City. I look forward to seeing you there. Thank you for your time today, and we will now open the line for questions..

Certainly. [Operator Instructions] Our first question comes from the line of Joe Pantginis from H.C. Wainwright.

Your question please?.

Hey, guys, good afternoon. Thanks for taking the question. Couple of questions on the future conductive of HOPE-2, if you don’t mind.

First, would you be willing to share any of your assumptions with regard to enrollment times and timeline for data?.

Yes. Thanks, Joe. So our anticipation is that the trial will enroll fairly rapidly, so we plan for fully enrolling the trial by, let’s call it, the second quarter of 2019. And then we’ll have an interim data analysis.

We haven’t announced exactly when that will be available, but it will be sometime in 2019, where we look at some portion of the data and determine path forward. And then the full datasets, we anticipate to be available around the year after a full enrollment, which, let’s call, that the second quarter of 2020..

Great. No, that’s helpful. Thank you. And then with regard to patient identification, obviously, the market is – should be able to come to you.

So maybe any comments with regard to patient identification? And more specifically, anything with regard to, say, rate-limiting steps in the screening of patients? And could you share any assumptions with regard to how many patients you think you might have to screen to get to the 84? Thanks a lot..

Yes, thanks. So we’ll update with screening assumptions as they potentially become available. Of course, we’ve had a tremendous influx of queries from the Duchenne community.

I think, most of the families know what we’re doing and because they have a therapeutic that can potentially treat the heart disease, there’s a tremendous amount of energy to, at least, look at the trial. In terms of screening, we don’t anticipate that there’ll be any potential barriers to screening and we anticipate that we’ll enroll well.

But, of course, if anything changes, we’ll provide updates along the way..

Great. Thanks for the info, Linda..

Thanks, Joe. Take care..

Thank you. Our next question comes from the line of Alan Leong from BioWatch News.

Your question please?.

Thanks for taking my questions and congratulations on the last quarter, as well as the provisions for the loan forgiveness. Linda, I don’t know how you do the ability to run on a dime is almost unbelievable.

Can you give us a few – I’d almost ask you to give us a few lessons?.

Thank you. I think, that’s a compliment. So, I think, we stay very focused. We know what our goals are. Our goals now are to get to the milestone of data from HOPE-2, and our team is finally tuned and finally honed. We work very hard and spend our dollars wisely to get where we want to go..

Well, I wonder if you can – it’s really for the entire audience, kind of go into – can you apply a little color on the typical – typically why the FDA would allow for an early regulatory approval for such a disease? What’s the rationale and motivation for the FDA to even think about such a concept?.

I cannot speak for the FDA. What I can tell you is that the FDA has expressed in their public guidances that they are motivated to move approval forward for diseases that are of terminal nature. And that as long as you follow along with what they request, they’re happy to work very closely with you to get it done..

If I may, I wonder, because the company has made some interesting progress on the exosomes. When I look at the readings in generally about regenerative cells, the source for the regenerative cells has always been an important issue, that kept, of course, cardiosphere-derived source versus generic regenerative cells.

Does the same apply to the source of exosomes? Can I make the same extension? Because it seems to me, it’s important to get exosomes from specific cells rather than from generic regenerative cells that I’m seeing in the literature.

Could you provide any color on that issue?.

Yes. So I mean, this is all in the world of early science. We’re still, as a field, trying to get our hands around how the exosomes work and which ones do and don’t. What I can tell you specifically about our exosome, the CDC-derived exosome is that they mediate the mechanism of action of ourselves. So we’ve done a lot of studies.

For instance, if you block the cells from making the exosome, you can block about two-thirds of the activity of the cells. And we have taken out the exosomes independently and are able to recapitulate the effect of the cells, for instance, by directly injecting them into the skeletal muscle of Duchenne mouse called the MDX mouse.

So we believe that the CDC-derived exosomes mediate the bioactivity of the cells. And therefore, are potential important next-generation therapeutic forward generic medicine..

Okay.

And lastly, did you want to provide any color on how the Cedar independent studies are going?.

Yes. So I can’t speak for the researchers of Cedar’s, but they publish quite regularly. So we’re happy to put you among the list if there’s a paper that comes out and we’ll send it along to you..

Amazing. Thank you very much..

Thanks, Alan..

Thank you. [Operator Instructions] And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to management for any further remarks..

Thank you. We look forward to providing updates at our next quarterly conference call. And with that, we’ll conclude this call. Thank you for your time today..

Thank you. Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day..