Gregory T. Schiffman - Chief Financial Officer and Executive Vice President of Finance Martin M.

McGlynn - Chief Executive Officer, Director, Member of Strategic Transactions Committee, Chief Executive Officer of Stemcells California Inc and President of Stemcells California Inc Stephen Huhn - Chief Medical Officer and Vice President of CNS Clinical Research.

Jason Kolbert - Maxim Group LLC, Research Division Keay Thomas Nakae - Chardan Capital Markets, LLC, Research Division.

Good day, ladies and gentlemen, and welcome to the StemCells, Inc. First Quarter 2015 Earnings Conference Call. [Operator Instructions] I would now turn the call over to your host, Mr. Greg Schiffman, Chief Financial Officer. Mr. Schiffman, you may begin..

Thank you. Welcome, everybody, and thank you for joining us today. With me today are Martin McGlynn, our Chief Executive Officer, Dr. Ian Massey, our President and Chief Operating Officer, who joined the company on March 23rd of this year; and Dr. Stephen Huhn, our Vice President of Clinical Research and Chief Medical Officer.

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 Securities and Exchange Commission and at the end of our earnings release, which you are encouraged to consult. Now let me quickly review our financial results for Q1 2015, following which, I'll turn the call over to Martin.

Operating expenses for Q1 2015 were up from Q1 2014 by approximately 31% or about $2.1 million. Approximately $800,000 or 40% of this increase is related to noncash stock compensation. Of the remaining approximately $1.3 million, approximately $600,000 are related to headcount growth to support our clinical programs.

And increases in R&D costs grew by approximately $700,000.

This is a combination of increases in costs associated with our Phase II clinical trial in spinal cord injury and dry age-related macular degeneration as well as process development activities offset by decreases in costs associated with our ongoing Phase I/II clinical trials for the same indications.

Loss from continuing operations increased by approximately 24% or approximately $1.8 million. The delta between our growth in operating expenses of approximately $2.1 million and the loss from continuing operations of approximately $1.8 million was primarily due to lower noncash interest expense accruals associated with the CIRM loan.

We will no longer be accruing expenses for this loan as it has been forgiven by CIRM in connection with the decision to cease work on the preclinical Alzheimer's program.

Last quarter, we began reporting a non-GAAP loss adjusting for the major noncash charges including stock-based compensation, depreciation and amortization, impairment of intangible assets and changes in the fair value of our warrant liability because we believe that this metric provides useful information to investors.

We have included a reconciliation table for these adjustments in our press release issued earlier today. For Q1 2015, the company had a non-GAAP net loss of approximately $7.4 million compared to a non-GAAP net loss for Q1 2014 of approximately $6.4 million.

The increase of approximately 15% or approximately $1 million is driven by the increase in headcount costs, clinical trial costs and process development activities discussed earlier. Our cash usage for the first quarter 2015 was approximately $11 million.

The cash usage includes an approximate $600,000 repayment of unused funds to the California Institute for Regenerative Medicine associated with the discontinuance of our preclinical Alzheimer's program.

On a pro forma basis, including the receipt of approximately $23.4 million net from a cash fundraising completed last week, our cash balance at end of Q1 was approximately $37.4 million.

We are still not in a position to provide specific cash guidance for 2015 as our net cash usage is very dependent on the number of patients transplanted in our controlled Phase II clinical studies.

Given that we have just begun enrolling patients in our Pathway Study in cervical spinal cord injury and have not yet begun to enroll patients in our dry age-related macular degeneration study, it is difficult to predict how many patients will be transplanted at this point in time.

Accordingly, until we get further into the year and have a better handle on recruitment rates, it is difficult to provide specific guidance in cash usage for 2015. Now with that, I will turn the call over to Martin..

The first-in-class cell-based biologic for the treatment of a broad range of debilitating diseases and disorders of the central nervous system. We are on track to obtain definitive answers to the clinical utility of these cells from 2 well-controlled Phase II proof-of-concept studies in 2017.

Success in either of these Phase II studies will, in my opinion, result in significant returns to our stockholders and provide much needed hope to the spinal cord injury and AMD communities.

As we are getting very close to achieving these milestones, it is essential that we have access to the capital resources needed to get the job done, which brings me to the second item that I want to discuss, the recent capital raise that we completed last week. Last year, we used approximately $27.5 million in cash to fund operations.

We started the year, this year, with $25 million in the bank, but anticipate that our burn will increase this year due to our accelerating clinical trial activities. We ended the first quarter of this year with approximately $14 million cash.

Market conditions from micro-cap companies to raise additional funds has been challenging for quite a while and there's little evidence that this is likely to improve in the foreseeable future. Moreover, recent clinical trial disappointments in the regenerative medicine space have exacerbated matters further.

Nevertheless, despite these challenging market conditions, the importance of having access to the capital needed to keep our clinical trial agenda on track was becoming a business imperative, and we were very pleased to see strong interest from investors.

We executed our capital raise and brought in approximately $23.4 million, which, when combined with existing cash resources, should enable us to continue to drive our clinical agenda closer to fruition. In terms of potential catalysts, the company has a significant number of material data releases coming out this year.

If the data continue to remain positive, these data releases have the potential to move the stock.

I will discuss the specifics on these releases later in the call, but I truly believe that if we successfully achieve the statistically powered clinical endpoints in our Phase II studies that are or will shortly be underway, it will move the stock significantly.

But this is why I remained focused on and committed to completing the clinical trials as soon as possible. As both a shareholder and CEO of the company, I firmly believe that this financing was critical for the long-term success of the company and will generate significant shareholder value over time if we are successful in our clinical programs.

I would now like to move on to discussing those clinical programs and the progress we've been making. Let me start by discussing our clinical efforts in spinal cord injury. We completed enrollment in our thoracic spinal cord injury Phase I/II study in April of last year.

This was the first in-human investigation for neural stem cell transplantation in patients with spinal cord injury, and our primary objective was to obtain the necessary safety outcomes to support further development of the spinal cord injury program, and ultimately, the investigation of patients with cervical cord injury.

In addition to showing safety, the interim results from the thoracic safety study have revealed signs of unanticipated sensory return in more than half of the patients.

This is the first time that positive effects on sensory function have been observed in a clinical trial in which stem cells are administered into the thoracic spinal cord of a spinal cord injury patient, and our investigators are extremely encouraged.

We're planning to speak to the details of these sensory changes when the 12-month outcomes are released next week.

Detecting signs of sensory improvement in this study is consistent with the anatomic organization and segmental function of the thoracic spinal cord as opposed to the cervical cord, where individual segments have a larger role in controlling motor function.

As of now, all 12 patients have completed their 1-year follow-up after transplantation of the cells, thereby completing the assessments planned by the study protocol.

We plan to release top line results for this trial at the joint International Spinal Cord Society and the American Spinal Injury Association Annual Scientific Meeting being held in Montréal Canada, May 14 through May 16.

I want to remind you that the developmental and regulatory pathway in spinal cord injury requires establishing safety in thoracic injury before testing can be initiated in the cervical injury population.

The probe test of neural stem cell transplantation in spinal cord injury includes understanding the impact in cervical injury, not only because cervical spinal cord injury is more prevalent, but also because the functional motor organization of the cervical cord is different than the thoracic cord.

The cervical cord will allow the ability to detect improvement in individual motor segments or function, which is not permitted in the thoracic cord due to the differences in motor control of the 2 regions of the cord.

We believe that the potential of this innovative approach is best tested in cervical spinal cord injuries, and we are the first company to initiate a Phase II randomized, single-blinded, controlled proof-of-concept study, with administration of stem cells into the cervical region of the spine.

As I will elaborate further, we've already dosed all 6 patients in the first cohort of this trial. As many on the call may already know, a randomized, single-blind controlled study is a study that randomly assigns patients to either a treatment or control group.

The control group does not receive the actual investigation product, but follows the same evaluations as the treatment prove [ph]. The assessors in the trial do not know which group the patient has been assigned and the outcome between each group is compared at the end of the study.

Having patients in a control group permits an unbiased evaluation of the effect in the treatment group. If a control is not included in the study, it is difficult to know if any effect observed in the treatment group is really associated with the investigational product or is just a placebo effect.

Randomized, controlled studies are the gold standard in clinical trials and the necessary step required for most FDA registration-enabling Phase III pivotal studies. A proof-of-concept study is one that is no longer primarily focused on demonstrating safety, but instead, it's designed to demonstrate the efficacy or effectiveness of a treatment.

Both of our Phase II trials are single blinded, include a control, have very objective metrics as a primary endpoint and are powered for statistical significance. The studies are designed to produce unequivocal and robust results of a clinically meaningful endpoint that should also meet regulatory requirements.

We initiated our Phase II proof-of-concept study in cervical spinal cord injury in December of last year. The Pathway Study will be comprised of 3 cohorts. The first group of patients to study will be enrolled in Cohort I, with the purpose of assessing 3 escalating cell doses. Cohort I will identify the cell dose for testing in Cohort II.

In Cohort II, 40 patients with no motor function below the level of injury will be randomized to either undergo HuCNS-SC transplantation or assignment to a nontreatment control. All patients in Cohort II will be evaluated according to well-established clinical assessments in spinal cord injury for 1 year.

Cohort III will enroll patients who have some preserved motor function below the level of injury and will explore the same dose escalation scheme as performed in Cohort I.

We believe there is value in testing neural stem cells transplantation in patients who have both complete and incomplete spinal cord injury, and the Pathway Study is designed to provide this clinical experience.

The primary objective of this study is to assess whether neural stem cell transplantation can restore or improve lost motor function in the upper extremities. The Pathway Study has been making great progress. We have 6 sites actively enrolling patients and several more expected to come online shortly.

In addition, 2 weeks ago we completed the enrollment of Cohort I. According to the protocol, 1 month data from all 6 subjects in Cohort I will be reviewed by the Data Monitoring Committee for safety and then the dose for use in Cohort II will be selected.

Cohort I set medical history by successfully transplanting more neural stem cells in the human spinal cord than has ever been done previously. We would expect to have interim results based on 6-month data from these first 6 subjects available in the fourth quarter.

Although this first cohort is not randomized and only includes 6 patients with variable cell doses, it may offer early insight into the outcomes of this approach in cervical spinal cord injury. To assist in the recruitment of potential patients for the Pathway Study, we are using a national recruiting web-based platform dedicated to our study.

We have been very pleased with the results we have seen thus far. In the first 6 months, we saw over 1,500 inquiries, with over 525 of these individuals taking the time to fill out the online questionnaire. Of those 525 questionnaires, 110 were forwarded to the clinical sites for consideration to be enrolled into the trial.

I think that this shows the level of interest and the support we're getting from both the patient and the physician communities. The current rate of enrollment is significantly faster than the Phase I/II study in thoracic injury and we're very encouraged to see the growing interest in our clinical research.

We expect to start enrollment of Cohort II starting in June this year. We're planning to conduct an interim analysis of Cohort II when half of the randomized patients have completed 6 months of follow-up. We anticipate that the most likely outcome of the interim analysis will be to continue the study to completion in 2017.

So I'd like to close the discussion of this study with an overview of the unmet medical need that exists in this indication. Today, there are approximately 1.3 million people with some form of spinal cord injury in the United States.

The majority of those impacted are between the ages of 20 to 30, with most of those being males with injuries associated with vehicle accidents or sports injuries. The average cost of supporting a person with a spinal cord injury ranges from $1.5 million to $4.5 million over the patient's lifetime, depending on the nature of his or her injury.

In total, this equates to more than $40 billion being spent on this indication per year in the United States. So as you can see, there's a large unmet medical need for therapies to help these victims of spinal cord injuries. The other clinical indication we are focused on is dry age-related macular degeneration, or dry AMD.

Many people are familiar with wet age-related macular degeneration, or wet AMD. There are several products in the market for people suffering from wet AMD, including Eylea, Avastin and Lucentis. The market for these therapies is over $4 billion in sales today. And it is estimated that the size of the dry AMD market is about 4x that of wet AMD.

Moreover, as of today, there are no approved therapies for individuals with dry AMD. Our clinical efforts are focused on the advanced form of dry AMD referred to as geographic atrophy, the underlying cause for loss of central vision.

The proportion of patients with geographic atrophy is similar in size to wet AMD market and the opportunity in this large unmet need, along with our expected aging population, is very clear. We completed enrollment of our Phase I/II study in dry AMD in June of last year and the 12-month data on the last few patients will be completed soon.

Interim results from the study based on the first cohort of 8 patients with severe vision impairment showed both the safety of the sales and the surgical procedure. The early data in this cohort also suggested favorable changes in the rate of progression in geographic atrophy as well as positive observations regarding measures of visual function.

Because we know that the changes in geographic atrophy in the first cohort of subjects, we've decided that further analysis of the changes in geographic atrophy between the study eye and the fellow untreated eye for all subjects will be conducted by an independent reviewer.

We will be releasing top line results from our Phase I/II study at a plenary session at the International Society for Stem Cell Research Annual Meeting in Stockholm this June.

We are planning to initiate a Phase II proof-of-concept study in dry AMD this quarter, and the primary endpoint for this study will be the rate of geographic atrophy or GA between the study eye and the fellow or control eye in a subject.

Geographic atrophy is an objective metric that will be primarily measured using a technique known as fundus autofluorescence. The primary endpoint will be examined by a masked and independent central reading center.

Geographic atrophy is an appropriate endpoint for studying the Phase II trial because it not only reflects the underlying pathological changes in dry AMD, but is also a metric that can be measured in a feasible time frame of a 1-year study and should be an approvable endpoint.

Other metrics of visual function will also be assessed as secondary endpoints in the study, but the pattern of changes in these other assessments of vision may not be as discreet as the rate of geographic atrophy.

We considered the Phase II trial design in dry AMD, also referred to as the Radiant study, to be an opportunity to show proof of concept of a meaningful clinical change resulting from neural stem cell transplant in dry AMD. The study will enroll a total of 63 patients who will be followed for 12 months.

All patients will receive a transplant of cells into their most affected eye and the untreated eye will serve as the control in the study. This design allows us to structure a much smaller trial while maintaining statistical power to show a compelling difference in the primary endpoint. We held the investigator meeting for the Radiant study last week.

It was well attended with investigators and/or study coordinators from 21 sites throughout the United States. We are now working with clinical trial state sites and their respective IRBs, and we hope to have the first subject dosed in the next couple of months. We would expect to have final results from this study in 2017.

So in conclusion, we will be releasing top line results for the Phase I/II trial in spinal cord injury in May and the Phase I/II trial in dry AMD in June.

With respect to our Pathway Study in cervical spinal cord injury, we will be releasing interim results from the first cohort in the fourth quarter of this year, and we plan to transplant the first patient in the blinded second cohort this June. We will be transplanting the first patient in our Radiant dry AMD study within the next few months.

Final results from both Phase II clinical trials are expected in 2017. So I hope you will agree that we have made significant clinical progress for both of our lead programs and are among the first in our space to solidly reach the proof-of-concept stage.

Personally, I have never been more excited about the future of our clinical programs and our ability to show the therapeutic capability of HuCNS-SC sales. With that, I would now like to open the call for questions..

[Operator Instructions] Our first question is from Jason Kolbert with Maxim..

I wonder if you could take a minute and help me understand how your approach is differentiated from those of others, particularly in the eye when we talk about dry macular degeneration. I know there's been recent news flow from 2 competitors also talking about their approaches.

So if you could just help me a little bit with the competitive landscape, both on the dry AMD side and maybe touch even on spine as well, that would be helpful..

Sure, Jason. Thank you, and I appreciate your observation about the comprehensive rundown. I think it's important that we be absolutely clear and everybody knows and understands our game plan and the time lines involved. So as we have Dr. Stephen Huhn on the call, our Chief Medical Officer, I'd like to have him address your question, Jason..

So Jason, I'm not sure exactly what other entities you might be referring to, but I think I can address your question. The approach that we have for geographic atrophy is one in which we're looking to arrest progression of the disease by what we essentially refer to as neuroprotective qualities or attributes of the neural stem cell.

And this matches the data that we have in the preclinical setting in which we observed not only preservation of the photoreceptors, but as well preservation of vision and vision function.

So the approach that we have is one that's going to be based upon arresting or slowing the progression of the disease, which, for someone with AMD, in particular dry AMD, who are in the later stages of life, could have a particularly value -- particularly if you were to -- durable effect from a onetime transplant.

The other approach is, what I think you might be referring to, if I could just speculate a little bit, is that specific cell replacement strategies for specific retinal cells, for example, replacement of the retinal pigment epithelial cells, which is part of the AMD pathology.

So we're not looking to replace the RPE cells, but our preclinical data shows that we may be actually substituting some of the function that's lost in the RPE as part of that disease.

Ultimately, others I think are pursuing this, maybe what you're referring to as well, a way of actually replacing photoreceptors in the eye from a -- in a retinal disorder. Certainly, that's an admirable goal and one that I think everyone supports.

But it has its challenges in that it's a very complex cell to replace and then that cell has to integrate into the neural circuitry of the retina.

So we think an approach is in many ways very simple and intuitive of simply protecting the threatened cells in the eye by using those attributes observed by the neural stem cell is a very viable first approach of thinking about cellular treatment for retinal disorders. I'm not sure.

Did I answer your question, Jason?.

Steve, you absolutely nailed what I was going after.

And if -- when we transition the same exact explanation on spine, can you help me understand how you selected the specific time line around implantation, which we can then use to differentiate your approach versus that of others in terms of when the cells are actually implanted on the spine side?.

Right. So there's a lot of particular important elements in this question, Jason. Most of this is driven on 2 points. 1 is that our preclinical data is strongly supportive of the effect of the cells at later time points than the acute injury itself.

We have data that shows that we can put the cells in at the immediate time of the injury, which is the acute period. We don't see any harm, but we don't necessarily see as a strong effect as we see when we delay the transplant to later time points. And there's lots of reasons for why this may be true.

It's likely that the inflammatory profile from the injury has settled down by that point in time. So a lot of our selection of patients who are at the late subacute or early chronic stage of diseases based upon our preclinical data.

The second part of this has to do with clinical trial pragmatism in some sense and it's nice that the stars align for our biology. Patients who are acutely injured have typically thereafter a period of spontaneous recovery.

That spontaneous recovery introduces things that make a power rate [ph] in a certain study much more difficult because you have to many more patients because the outcome is more variable.

When you select patients for entering the trial who have, for the most part, reached a plateau of stability and the likelihood of spontaneous recovery is down, then you begin to look at trial numbers for proof of concept and perhaps even more definitive studies that are much more manageable for spinal cord injury.

So by waiting in our current Phase II study until the patient's at least 4 months from injury, we're already dealing with a patient population that should have much less variability. So that is a dramatic effect on our power calculations..

[Operator Instructions] And our next question is from Keay Nakae with Chardan..

Wonder if I could just follow up on the question Jason had with respect to dry AMD. Dr. Huhn, you talked about the neuroprotective aspects of your stem cells. Certainly, we've seen the effect on the myelin.

Can you talk about how that translates into protecting the support structure for the RPE cells?.

So the RPE, and not to get into too much detail, there's a couple of important things to support the overlying photoreceptors. They do a process known as phagocytosis, which is essentially metabolizing the debris that's shed by the active photoreceptors. So we've seen in our preclinical studies evidence that the debris zone was absent. We wondered why.

We turned to electro microscopy studies and showed in fact that the neural stem cells are phagocytosing the shed debris by the photoreceptors. So in many ways, taking over a process that's been lost by the RPE.

We also know the RPE is responsible for different trophic factors that support the photoreceptors, and we know that the neural stem cell also secretes these factors with a lot of overlap. So I think the mechanism of action, if this is sort of what you're alluding to, is likely to be multi-factorial.

And that's sort of the beauty of a cellular approach is that, unlike a small molecule which could typically exert one mechanism of action, a cell can take on more than one mechanism. So we think that those combined approaches or mechanisms should result in preservation photoreceptors.

So photoreceptors that are being threatened by loss secondary to AMD should be stabilized by a neuroprotective approach..

Okay, great. And then you will [ph] see delay in getting AMD up and running. Can you talk about any last-minute changes to the protocol that you haven't previously discussed and maybe more specific on that point, the ability to possibly increase the sample size in the trial. It seems like that one is also in sort of interim work..

So our current Phase II study, we had to be thoughtful about this and undertaking a proof-of-concept study.

At this stage, based on our Phase I data, required very careful planning on our part so that there were some delays in making certain that we were going to be creating a protocol that we felt would be the best protocol to move forward into clinical testing.

The plan for the Phase II will have an interim analysis that we'll look at, if you will, distribution of patients, so we can increase the trial length or increase patient population if the interim analysis indicates us the need to do so.

As we all recognize, AMD has a time course of progression, so the trial has an element in it that's built in to address that should we need to execute that particular question..

And in terms of possibly extending the length, then what is the time point where you're looking to do the interim analysis?.

It's about midway through the trial..

Both in terms of patients and with respect to the 12-month follow-up?.

With regard to the number of patients that we will have and the follow-up length for those particular patients. You want have sufficient follow-up in the group of patients that you're going to be basing the interim analysis on, so you're confident in the results of the interim analysis..

Okay. And then just finally, with respect to the number of trials we should now expect to participate in the AMD study, it sounded like you just had a conversation with 21-ish in site.

Is that about the number of sites we should expect to participate in the study?.

Yes, I think that's pretty much -- very much in the ballpark. Martin, go ahead..

It's pretty much in the ballpark. Of course, if there are additional study centers that are interested in participating and we feel that they are fully qualified to do so, of course we would be willing to accommodate additional sites..

Okay. And if I could just squeeze one last question related to the upcoming data at ISSCR.

Is that time frame -- is that enough of a window to have follow-up on all 12 or follow-up on all 15 patients?.

Stephen?.

Yes. So we believe that as we recognize the last few patients are finishing up their 12-month visits and we'll have adequate time to produce the top line analysis of the major results from the Phase I/II..

And I'm not showing any further questions. I'd now like to turn the call back over to your CEO, Martin..

Thank you very much. And Jason and Keay, thank you very much for your very insightful and thoughtful questions. I'd just like to conclude with a couple of remarks. I've talked about how this is a transformational time for our company and have discussed that at many occasions and in many different places. We give you some insight into that.

In the first 9 years of clinical activity, we dosed 38 patients through the end of 2014. In 2015 and '16 combined, we anticipate dosing approximately 94 patients and will enroll approximately 114 patients into our 2 Phase II trials and we should have approximately 25 to 30 sites enrolling patients by the end of this year.

The most clinical sites we've ever had enrolling at one time previously was a total of 6. We're generating data at an unprecedented rate and we're rapidly approaching final results on 2 Phase II controlled proof-of-concept clinical trials. This truly is an exciting and transformational time for StemCells Inc.

So I thank you for joining us today and for our quarterly call. And I look forward to updating you again on our clinical progress as the year progresses. Thank you, all..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day..