Investor Stemcell

Transcript – ACTC 2011 Year End Earnings Call, Friday March 2, 2012 9:00am EST (Duration: 59:31 min)

On the Call: Gary Rabin, Matt Vincent, and Kathy Singh

Operator: It is now my pleasure to turn the webcast over to Gary Rabin. Mr. Rabin you may begin your conference.

Gary Rabin: Thank you very much and good morning. My name is Gary Rabin and I am Advanced Cell Technology’s chairman and CEO. I am joined today by Matt Vincent, Director for Business Development and Kathy Singh, Controller. Before we begin, I have asked Kathy to read the following statements. Kathy?

Kathy Singh: Thank you Gary – and good morning (she read the standard disclaimer statement)

Kathy Singh: (2:06 min) Now I would like to review our financial results which are discussed in greater detail in the 10K we filed with the Securities and Exchange Commission last night. I am sure many of you also saw the press release we issued last night.

Revenues for the 12 months ended December 31 2011 was approximately 500,000 compared to 725,000 in the 2010 calendar year. The decrease in revenue during the 2011 year was due to licenses being terminated during the 4th quarter of 2010 which reduced revenue recognitions during the 2011 fiscal year. R&D expenditures increased from 8.4 million in 2010 to 10 million for 2011. The increase in R&D expense primarily was associated with increased clinical activity associated with the Phase I/II trials. General and administrative expenses for 2011 compared to 2010 decreased by 4.5 million to 11 million in 2011. This expense decrease was primarily a result of a decrease in compensation and stock issued for services from the prior year. The company utilized 13.6 million in cash for operations during the year compared to 8.8 million in the year earlier period. The increase in cash utilization resulted primarily from ACT’s ongoing clinical activities in the US and Europe.

As many of you are aware of from our filings, we have been involved in litigation relating to certain financings that the company’s previous management team entered into. This litigation was triggered because there were claims made that the previous fundings should have resulted in a lower exercise price for certain warrants held by investors due to certain price protections the investors had in their deals. As a result we took several non-cash charges in 2011 totaling approximately 51 million to reflect the cost of stock that was issued to investors. I want to emphasize that these are non-cash and don’t affect the company’s financial condition. These non-cash charges represent theoretical costs of stock issuances to these investors based on upon a 14 cents stock price. We believe that by settling with these investors that we have eliminated substantial future risk and uncertainties associated with the litigation process.

ACT ended the year with cash and cash equivalents of 13. 1 million compared to 15. 9 million in cash and cash equivalents in the year earlier period. ACT has enough cash on hand to complete its phase I trials without going back to the capital market. We expect 1st quarter cash utilization to be similar to the 4th quarter with our cash then declining during the 2nd quarter as the patient treatment parts of the phase I/II trials are completed. We have sufficient cash well into this year excluding any new initiatives the company may undertake or additional funds we may secure through available funding commitments we have. Now I would like to turn the call over to Gary. Gary?

Gary Rabin: (5:36 min): Thank you Kathy. I want to address the steps that we have taken to advance our clinical activities over the past few months as well as the steps we are taking to build sustainable long-term value for shareholders. As many of you know, earlier this year we announced Phase I/II clinical data that was subsequently published in The Lancet which demonstrates the safety of ACT’s human embryonic stemcell derived retinal pigment epithelial – or RPE – cells for the treatment of Stargardt’s Macular Dystrophy – SMD, and dry age-related macular degeneration – dry AMD. Results were reported for two patients, the first in each of the Phase I/II clinical trial. In addition to showing no adverse safety issues, structural evidence confirmed that the hesc derived cells survived and continued to persist during the study period reported. Both patients had measurable improvements in their vision that persisted for more than four months. At four months following treatment no hyperproliferation, tumorgenecity, ectopic tissue formation, or apparent rejection were observed in either patient at any time. Detailed clinical and diagnostic laboratory assessments were performed at multiple transplantation evaluations. There was no abnormal growth or tumor formation which would be considered a significant safety concern for stem cell based therapies, in particular those derived from human embryonic stem cells due to their pluripotency.

Although very early, anatomical evidence of successful stem cell derived RPE transplantation was observed clinically and with high resolution imaging technology in the patient with SMD. This evidence included an increase in pigmentation at the level of RPE within the area of the transplant and even extending outside the area of the transplant beginning one week after transplantation and throughout the follow-up period. Transplanted stem cell derived RPEs appear to engraft in the proper location and assumed normal RPE morphology. Engraftment and increase in pigmentation were not detected in the dry AMD patient, though this does not necessarily mean that it did not occur. The cellular mapping and scanning capabilities of the back of the macula are evolving at a rapid pace but remain highly imperfect. Regardless, both patients showed visual improvement. I would like to put this into context. These were patients with very low vision. When vision is that severely compromised it is difficult, and in fact no regulatory consensus exist regarding how to best measure visual changes in these patients. As reported in The Lancet, the visual acuity of the Stargardt’s patient improved from only being able to see hand motions to 20/800 vision. Before treatment, the patient was unable to read any letter on the ETDRS visual acuity chart. However, by two weeks post-transplantation, she was able to start reading letters with the treated eye and it improved to 5 letters at 1 to 3 months.

To date, we have treated one patient with dry AMD at UCLA and a total of four patients with SMD, three at UCLA and one at Moorefield Eye Hospital in London. The recent treatment of the two SMD patients at UCLA represents the entire first cohort of patients for this initial dose of cells in the SMD trial. On March 7th we will have completed the passage of 4 weeks since the treatment of the third patient at UCLA and we will then prepare this data for submission to the Data and Safety Monitoring Board – DSMB. We expect that submission to occur around March 21st. When the DSMB has completed their review, we will move to treat the fourth patient who represents the first of the second cohort. That patient will be injected with 100,000 cells in the same 150 microliters of fluid medium. We are quite excited to advance to this dose escalation as we expect it will more closely approximate the number of cells that would be injected in each bleb in later trial stages and eventual commercialization of the product. This week we have also past the 6-week check-up on the first SMD patient in the UK. We will be submitting the data on this patient to the DSMB as well and we will then move to advance to finish this cohort in the UK.

Some of you may be wondering why it has taken longer to enroll clinical trial patients than may have been expected in the AMD trial. In the case of that trial, several of the initial patients that principal investigator Dr. Steven Schwartz of UCLA had identified as good candidates from which to select patients, two and three, wound out being screened out of eligibility in the final battery of tests. The patients all passed all initial health screenings, completed the reviews of their medical records, had extensive optical analyses, but sadly, on the eve of the surgery the longer lead time screenings for cancer or even the gene for certain cancers, viral infections, and advanced cardio testing yielded previously unidentified positive results. This is unfortunately not an overly uncommon occurrence in clinical trials but clearly is more likely to happen in a trial with a patient population that tends to be elderly by definition. Dry AMD is after all age-related and an older patient population will invariably have more complicating health factors that could affect final eligibility to participate in clinical trials.

The Food and Drug Administration’s protocol for our surgeries, as you are also likely aware, involves a course of immune suppression before and for a period of time after the transplant. And the patient’s ability to tolerate this without adverse effects is a critical factor in inclusion in our study. The extremely poor visual acuity requirements in the FDA protocol results in a decidedly elderly patient population with patients typically being 77 years old or so at the very youngest. When that factor is combined with the requirement of an intact Bruch’s membrane, no evidence of wet AMD even in the fellow eye, and the general health related restrictions mentioned previously, it makes for an extraordinary challenging patient screening process in the dry AMD trial relative to that for the SMD trial. We continue to work with the leading eye institutes in the country, such as UCLA and Wills in Philadelphia, and are confident that we will complete the trial on a timely basis. We are adding at least one more and perhaps two additional trial sites in the coming weeks and if these clinics come online we expect the pacing of dry AMD trial surgeries to escalate as all the clinics will be screening patients. Because of the huge market size of dry AMD, both we and our clinical investigators have been surprised by the difficulty of enrolling qualified patients. In that case we are preparing to file a protocol change with the FDA that will allow us a little wider berth in the exclusion criteria and are now working with our clinical partners and the DSMB to facilitate this.

I will now make a brief comment on the patients that have been treated since The Lancet paper was published but I cannot answer any additional questions beyond this comment:

The next three patients that have been treated are still quite early in the course of their post-surgical reviews. We would say that we have observed a generally similar trajectory as we saw from the first SMD patient at this stage of post-surgical review, both as it relates to safety issues as well as visual acuity developments. This is obviously very exciting for us as we are treating very late stage patients with highly atrophied tissue in the fovea or center field of vision. We had never expected to be seeing any visual improvements in this patient category. On the first two patients that we treated and whose profiles were described in The Lancet, one recorded stable improved visual acuity at 6 month and the other showed continued ETDRS visual acuity chart improvement.

Now I would like to shift and provide some detail on some of the items that many shareholders are focused on. As many of you know we completed a global settlement with debenture holders which resulted in substantial dilution for existing shareholders. This came just after we announced the clinical trial results – the most significant news in the company’s history – a time which should have been a period of great value creation. I want to assure shareholders that we did not agree to settle this litigation without considerable thought and legal counsel. However, while painful, it was necessary to resolve the considerable uncertainty and risk associated with that litigation and that failing to do so, would hamper the company in its efforts to realize full value for its shareholders. Now that the risk of such litigation is largely behind us, we intend to take additional steps to try to maximize shareholder value. One of those steps necessitates fixing our company’s capital structure. As a result of the company’s past dealings and issuances of securities at challenging periods in its history, ACT today has just over 2 billion shares outstanding. To put that number into context, Amgen has nearly half that number issued and most small cap biotech companies at our stage of development only have 25 to 75 million. When we talk to investors, the one message we hear continuously is that they love our science but that we need to fix our capital structure. To date we have taken a big step toward doing so. We filed a preliminary proxy in which we are asking shareholders to give management the authority to effect a reverse stock split in a ratio of anywhere from 1:20 to 1:80 depending upon market conditions. We do not undertake this matter lightly. We realize that it could create some near-term volatility but believe that a reverse stock split, which we would only do in conjunction with a listing on the NASDAQ capital market, will allow our stock to become more attractive to a wide range of institutional investors facilitating, we believe, a higher valuation for all. Such a reverse split and NASDAQ listing will also allow us to qualify for membership in the Russell 2000 when the index rebalances in June. Russell inclusion should also contribute to a wider following for the stock. We intend in the near future to file an application to list on the NASDAQ. The plan would be to secure approval for NASDAQ listing contingent on completing the reverse split. We are optimistic that this progress can be completed over the next few months. You have my commitment that we will not venture into this reverse split without first ensuring that we take the steps to enhance the marketability of our stock. Nor would we reverse the stock prior to the NASDAQ listing approval. We have already begun this education process. Over the past few weeks we have met with more than 15 large mutual funds and other healthcare focused institutional investment funds. We are continuing this process. We have received considerable interest in investing in the company once we are listed on a national exchange and no longer a penny stock. This company has not been substantially institutionally investable in the past. The lack of timely filings, availability of investor materials, lack of internal management and control structures, warrant and debenture hang, and other critical due diligence items together created an insurmountable obstacle. With the operational changes that we have made and the solid proof of our clinical concept advancing, we are now in a completely different place. This is the position of strength that I have discussed. We have nearly 45,000 retail holders of our stock. It is nearly impossible to build sustainable and event-drive stock price rises with an investor base of this size investing from the size of investments these investors make. There is also the matter of institutional credibility. Biotech companies with global clinical platforms and proven science, with large pharma partnerships across multiple programs, are not penny stocks listed on the OTC bulletin board.

I want to raise an important point here as well. There appears to be some confusion about the authorized shares. We will also be decreasing the authorized share amount at the time of the split.

I want to address the many questions we have been asked about our corporate development plan as well – beyond, of course, our ongoing clinical trials. We are working hard to lay out a timeline and plan for these follow-on programs, many of which we revealed in our recent presentations. These include corneal tissue, mesenchymal stem cells to treat ocular diseases, retinal progenitor cells, blood platelets, and other indications for the RPE cells, including myopic macular dystrophy. We are also evaluating the use of IPS cells, or induced pluripotent stem cells, rather than human embryonic stem cells for some of these opportunities. We have made some very significant strides using IPS cells and we hold some very important intellectual property in this area. The cost and timing of the initiation of these programs can be significant and we are planning out a complete development program which we will present and discuss at the annual meeting in April.

In summary, we are very excited by the progress we are making clinically, and in addressing the corporate issues that have been created over the past year, with a strong balance sheet sufficient to fully fund our current clinical trials, we believe the next 12 months will allow us to achieve many important milestones. Now I would like to open up the call for questions. Operator?

Q & A session (21:12 min)

Operator: … Your first question comes from Jim Coon.

Jim Coon: Good morning Gary.

Gary Rabin: Morning.

Jim Coon: Congratulations to you and the team on the results, the initial results of the first two patients. Very, very exciting. I just have a question on the Stargardt’s trial. From a timing…the phase I of the trial is there any discussions going on right now with the FDA to enable you guys to treat younger patients, younger SMD patients, for the Stargardt’s trial and any possibilities of, or any discussions going on, about potentially bypassing phase II and going directly to a phase III trial?

Gary Rabin: Alright. In terms of the Stargardt’s trial, we don’t really…we are not having any difficulty enrolling patients with the exclusion/inclusion criteria that are part of our protocol. And for phase I, we don’t anticipate making any changes to that. Clearly, as we progress and get more data from the entirety of this cohort in SMD, and then of course the next cohort – the 100,000 cell dose cohort – at that point we’ll start evaluating whether or not we can move to accelerating termination of this trial, and then obviously moving to a pivotal trial. But it’s really too early to have begun those discussions. We just haven’t treated enough patients yet nor have we treated patients with a dosage, like I mentioned earlier, that more closely approximates what we expect to be later trial stage or commercial dosage. But, we are obviously very cognizant of the benefits we have associated with this being an orphan disease.

Jim Coon: Do you see… is there any kind of indications that you get or any preliminary discussions with the FDA where if the results, you know, with the 100 K cell dosage, or 150 K, if that continues to trend on what you seeing on this first patient, and you know no safety issues will be coming up on June at that time, could you characterize anything as, you know, you guys saying hey if we see that kind of results with a 100 K then we would submit an application to try to terminate to move to phase 3 and push it, or how are you going to approach this if you come up with stellar results at 100 K? You guys are going to be aggressive to push this or just defer to the FDA?

Gary Rabin: We are going to be extraordinarily aggressive. We obviously want to get to compassionate use sales and to a pivotal trial as quickly as we can. But, I think, even though we are all blown away by the fact that The Lancet would publish a paper relating to the early biological efficacy of two patients at only three months, we still have to put all of that into context and we must continue to treat patients, go through the protocol, and obviously we will be very aggressive at trying to accelerate. Look, nobody wants revenue into this company faster than we all do, but we have to get to a critical mass of patients.

Jim Coon: Ok. Thanks Gary.

Gary Rabin: Next question.

Operator: Your next question comes from Ken Ziegleaf. (25:13 min)

Ken Ziegleaf: Hi Gary. First off congratulations again… This is just exciting times for myself as a shareholder and I look forward to the months ahead. I wanted to step back, and I know you alluded last call that you really didn’t want to talk about some of the market dynamics of our stock. However, I think on a legacy basis there must a tremendous amount of, in my opinion, naked short positions and I am curious with your background in the capital market, what are you plan on doing to reconcile these accounts and possibly get some more attention for the market regulators to address what might be a significant amount of short sale positions? Thank you.

Gary Rabin: You bet. …I have actually hired a group that assists in evaluating naked short positions. And, unfortunately, one of the problems with being a bulletin board stock is that the SEC just doesn’t seem to really want to do anything about enforcing