Below is the entire COPY n PASTE of the Cowen and Company 38th Annual Health Care Conference Dated 12, March 2018.
This is very long, but, WELL WORTH THE READ, for anyone wanting to understand CTSO.
Four months dated, (already outdated, were growing so fast!) but very informative. Don’t be short, shorties!
COPY N PASTE:
<<Joshua Jennings, Analyst, Cowen and Company>>
Okay, great. We're going to get this session started here. I’m Josh Jennings, Medical Device Analyst at Cowen and we're fortunate to have the management team from CytoSorbents participating in the Annual Cowen Health Care Conference. So we're excited to have CEO, Phill Chan; and CFO, Kathleen Bloch here. I’m going to hand it over to Phill to take the reins and give the presentation. Thanks.
<<Phillip P. Chan, Chief Executive Officer and President>>
All right, thank you very much, Josh, and good afternoon. Welcome everyone. I'm glad everyone was able to join us today at the end of the day here. My name is Dr. Phillip Chan. I'm the CEO of CytoSorbents Corporation, ticker symbol at NASDAQ, CTSO. We're helping to reduce deadly uncontrolled inflammation and hospitalized patients worldwide with our CytoSorb blood purification technology. As a publicly traded company, please let me remind you of our Safe Harbor statement for forward-looking statements.
CytoSorbents is a leader in critical care immunotherapy. We’re leading the prevention or treatment of life threatening illness in the intensive care unit and cardiac surgery using CytoSorb blood purification. At a glance, we’re a NASDAQ traded company trading at about $7.75 a share. CytoSorb is a European Union approved with 35,000 cumulative treatments, now distributed in 45 countries around the world.
We have totaled 2017 revenue of $15.1 million of which $13.4 million were CytoSorb sales, blended gross margins of 71% that makes higher margin direct sales versus lower margin distributor sales, very healthy 71% with $17.3 million in cash at the year end 2017. We have approximately 90 employees across two wholly-owned subsidiaries. Our main office is just North of Princeton in New Jersey. This is where we do the manufacturing of CytoSorb all the QA, QC, where we do all of our R&D as well as where we have our administration and management. But we also have a second office in Berlin, Germany that manages direct-sales in five countries in Europe including Germany, Austria, Switzerland, Belgium and Luxembourg and manages international sales throughout other countries.
We've been very fortunate to have had strong interest from strategic partners, Fresenius Medical Care, the largest dialysis company in the world, is one of our strategic partners; Terumo Cardiovascular is the largest cardiac surgery disposables company in the world; also another partner Biocon, the largest Biotechnology company in India; as well as Dr. Reddy is a $2 billion Global pharmaceutical firm. Our technology has been the beneficiary of more than $22 million in grants and contracts from the likes of NIH, National Heart, Lung and Blood Institute, DARPA, U.S. Army, Air Force, USSOCOM and many others. We are on the Russell Microcap Index with coverage by Cowen, H.C. Wainwright, B Riley, Aegis, Maxim, and Zacks.
Now in 2018, we believe this will be a transformational year for the company hitting two very specific milestones. The first is that we expect to achieve very rapid growth and operating profitability, which excludes non-cash expenses and clinical trial costs, but we expect to hit operating profitability on a quarterly basis later this year. The second major milestone is that we are on path to U.S. approval potentially with our U.S. REFRESH 2 cardiac surgery trial that has already begun and is waiting first patient enrolled.
We have a very strong management team at our company. You heard a little bit about my
background. I’m a former MD, PhD internal medicine physician trained at Yale and Harvard, also spent five years in Venture Capital Fund, but has been leading this company for the past 10 years. I'm joined by Kathy Bloch, my Chief Financial Officer, with a strong background in manufacturing in both my pharmaceuticals as well as other general industries. The other person to note here is Dr. Eric Mortensen, who came on board as our new Chief Medical Officer in of June last year. He’s former Vice President at Pfizer, former Therapeutic Area Clinical Head for Inflammation and Immunology lead the clinical development of Xeljanz, which is Pfizer's billion dollar rheumatoid arthritis product and is now leading our clinical program.
So what we're here talking about today is deadly uncontrolled inflammation. And we see this every single day in ICU all over the world and life threatening illnesses like sepsis, influenza, trauma, burn injury, cytokine release syndrome and CAR-T cell immunotherapy and other cancer immunotherapies, liver failure, surgical complications, pancreatitis, lung injury and many others. The problem with this deadly inflammation is that it causes cells to die, organs to fail untimely leading to multi-organ failure and death. And organ failure is the reason why nearly half of all people die in the ICU today, for which there is very little to help them. It's all supportive care of life support therapies nothing actively to help them get better.
And today, there’re very few options to treat this kind of deadly inflammation. Here you can see that anti-inflammatories have been tried in clinical trials. They have not worked traditionally because they have been too weak. And immunosuppressive drugs like a high dose steroids have also not worked, although they suppress inflammation very well. They do so by crippling the immune response and that's something that you don't want to do in a critically ill patient, because it's your immune response that's keeping you alive, helping you heal and helping you fight hospital acquired infections.
So this is really where our product CytoSorb comes in. CytoSorb bridges this gap by reducing the fuel to the fire of inflammation through blood purification. This target's a $20 billion opportunity in critical care and cardiac surgery. And CytoSorb is approved in the European Union as an extracorporeal cytokine absorber with the broad indication for use in any situation where cytokines are elevated that means this can be used in on-label for all the diseases that we've mentioned so far. But the nice thing about this therapy is that it is broad spectrum and it can reduce a broad range of inflammatory mediators, not just cytokines, but bacterial toxins, activated complement hemoglobin, bilirubin and many others that are causing an inflammatory reaction.
And again it's been safe and well-tolerated now in more than 35,000 human treatments up from 20,000 cumulatively a year ago. Now the heart of the technology is a highly biocompatible porous polymer bead, roughly the size of a grain of salt. Each of these beads has millions of porous and channels in it that allow it to act like a sponge to extract toxic materials from blood and bodily fluids based on size and surface absorption. Big things like cells cannot get into the porous, they want going around the bead and are unaffected.
Very small things like electrolytes go straight through the bead and are unaffected and we have very good safety data on that. But appropriate sized molecules, these mid-molecular weight inflammatory toxins get trapped in this vast network of porous and channels of every single bead permanently eliminated from blood. This is a proprietary patented technology that we manufacture from base chemicals ourselves at our facility in New Jersey and it’s in fact one of the highest grade medical sorbents on the market today.
Now the important thing about our business model is that we do not manufacture machines. We only manufacture the high margin razorblade if you will that works in the existing blood pump infrastructure found in hospitals around the world. The dialysis machine, CRRT machines, extracorporeal membrane, oxygenation machines in the ICU as well as heart-lung machines in the operating room.
Basically very simple to use, take blood out of the body, pump it through this cartridge, the beads extract the toxic materials from blood, purified blood goes back into the body and you just recirculate the blood over and over again such that in a 24-hour period we can treat the entire blood more than 70 times and each day we do a new device – a new treatment we use a new device, so truly a single use disposables model.
Now the goal of this therapy is why should we let patients have uncontrolled deadly inflammation that often sends them into organ failure and death, rather let's control it upfront aggressively with this product, reduce the inflammation thereby helping to reduce the severity of illness, getting them out of the ICU faster and helping to improve patient outcome and survival while decreasing the massive costs of ICU and patient care.
Now to give you some examples of how this is worked in principle, so this was a study 20 patient perspective single arm study in patients with refractory shock – septic shock. This is when even vasopressors strong medicines like epinephrine, vasopressin, dobutamine don't work to maintain adequate blood pressure. These patients will die. In fact 90% to 100% of these patients will often die because the circulatory system cannot circulate oxygenated blood to vital organs. They will suffer ischemic permanent injury and ultimately the patient will die. With our treatment, we were able to bring 65% of those patients out of refractory shock, leading to 45% survival.
And another application is in cardiac surgery, heart transplant. Patients who undergo a heart transplant often come out of the transplant very unstable. They're typically in shock even though the hearts are not working completely, but their blood pressure also has dropped. And these patients are very difficult to manage often put on vasopressors or other type of mechanical support like ECMO. And in this particular study and a Matched Pairs Analysis, they showed that patients who got CytoSorb during the open heart surgery, right, during cardiopulmonary bypass exhibited much better hemodynamics stability, requiring fewer vasopressors and that also led to improvements in clinical outcomes such as fewer cases of acute – an acute on chronic renal failure requiring dialysis that was statistically significant, a trend to less kidney injury, shorter mechanical ventilation and shorter ICU stays in the treatment group and no deaths in the treatment group versus two deaths in the control.
Now, this is obviously not yet a randomized controlled study, but we'll be talking a little bit later about some of the RCTs that we are doing. And then another very promising area is in the area of cytokine release syndrome and CAR-T cell immunotherapy. Most of you are familiar with the products by Novartis, Kymriah or Yescarta by Kite Pharma, which was acquired by Gilead for $12 billion. Juno is also developing CAR T cell immunotherapies. They were acquired by Celgene for $9 billion.
Well one of the hallmarks of taking someone's blood cells out of their body putting a gene in them to recognize cancer and putting them back into the body is that although they hunt down cancer cells very effectively. They can also over stimulate the immune response leading to something called cytokines release syndrome, which is just another term for cytokine storm that CytoSorb treats, right. These patients often wind up in organ failure and some patients have died. So, today, they control it with an IL-6 receptor antagonist called tocilizumab and steroids, but both of those have negative consequences including immune suppression and potentially compromised of the $0.5 million CAR-T cell immunotherapy.
Cytokine – CytoSorb has been demonstrated to be able to control very similarly related illness called HLH, hemophagocytic lymphohistiocytosis. And in the CRS literature, they've drawn parallels to HLH as well as macrophage activation syndrome. And this is one of the reasons why we believe that CytoSorb could be used as an alternative to that. And so, Kymriah and Yescarta are believed to – they will be approved in the European Union sometime in the first half of this year if everything goes well and that would give us a prime opportunity to be able to use CytoSorb because we're all throughout Europe, particularly in Germany.
And as further validation of our technology, Dr. Carl June, the pioneer of CAR T-cell immunotherapy, joined our Scientific Advisory Board last March. So wherever you look, whether or not it's the epidemic disorder like the bad influenza epidemic that we’ve just had, the 30 million people get severe sepsis and septic shock every year, 6 million to 9 million people die even with appropriate antibiotics, right, or the people suffering from natural disasters like earthquakes to get crush injury and trauma, the shooting victims of these terrible tragedies at the schools or the terrorist bombings. Everywhere you look, this is in fact were CytoSorb could potentially be used.
Today, our commercial organization looks as follows. On the left hand side is our European and ex-U.S. effort, 45 countries worldwide, critical care in cardiac surgery, but in the United States we are pushing towards U.S. approval with our pivotal REFRESH 2 trial. Now to understand our commercialization effort, it's important to note as I mentioned before this is a high margin razorblade that works in someone else's razor business model. Blended gross margins are 71% and as we bring on a new manufacturing facility slated to come online in Q2 of this year, so just in a few months. We are expected to drive those blended gross margins closer to 80%.
Our average direct selling price is approximately $1,000 per cartridge; approximately 1 to 10 cartridges are used for patients, so in a cardiac surgery patient one to two cartridges, in a sepsis patient three to five cartridges. So it's roughly $3,000 to $5,000, which is roughly one day in the intensive care unit. So imagine if we could save just one day off the ICU stay of a sepsis patient is typically in the ICU anywhere from 12 days to 18 days on average at a cost of $45,000 to $65,000. It could be actually a major cost saver for these hospitals that lose billions of dollars collectively every year on sepsis and other critical illnesses. But also things like on ECMO, they're using 5 to 10 cartridges per day.
So, in Germany, when you just distill this down to a single country and Germany is where we are the strongest today, 60% of our revenues come from here. 400 hospitals have more than 400 beds. Each of these hospitals sees 300 to 600 patients a year, three to five cartridges a patient that's a revenue opportunity of $1 million to $3 million per hospital for sepsis alone. In 2016, we disclosed that one German hospital already achieved sales of $1 million, but we are in most of the major university and public hospitals in Germany and we anticipate that these trends will continue.
Now we have a mixed hybrid model for sales. We sell direct, as I mentioned before, in five countries in Europe. And this is just part of our sales team there. And we estimate that the German market alone with 155,000 sepsis patients a year, as well as many critically ill patients and cardiac surgery patients is alone worth $1 billion to $1.5 billion as a total addressable market. This is where we have a direct sales force, where we have very strong key opinion leader support. We were in the major university and public hospitals. And then last year we obtained dedicated reimbursement for Germany that fully covers the cost of CytoSorb and ancillary products for treatment. And this was done with the support of the German Sepsis Society, the German Cardiothoracic Surgery Society and the Society of Nephrology. Germany is primed for more rapid growth with these catalysts and this infrastructure in place.
But we are also distributed in a total of 45 countries around the world, as you can see here with our partners. And that has led to four major strategic partnerships in areas of renal dialysis, critical care, cardiac surgery, pharma and biotech, and others. These are our partners, Fresenius Medical Care, Terumo, Biocon, and Dr. Reddy's they represent major catalysts, future catalysts to growth. But it is very much mutually beneficial for both parties, because CytoSorb helps each of these companies further penetrate the lucrative critical care market where ASPs are high, average selling prices are high, where clinical need is high while providing a high margin disposable that can drive profitability of even players like Fresenius, which is a $17 billion revenue company.
Fresenius expanded their relationship with us, from initially six countries with exclusive distribution to now a co-marketing agreement across all of our territories. They are now – and we've now penetrated to about 25% of our country's overall. Biocon just expanded from India where they've been having a lot of success. It's now opening the doors in Malaysia. Terumo Cardiovascular, our partner in cardiovascular surgery represents our on entre´e into Japan which is, Terumo is a big Japanese conglomerate. And they are the leader in cardiac surgery and ECMO in Japan. And they represent our entre´e into the second largest medical device market in the world potentially. And then Dr. Reddy's which we saw in last year, who is our partner in South Africa but also is looking to expand their footprint.
Now this clinical activity and this commercial activity have led to very strong growth. In fact we in fourth – the fourth quarter we logged in our 22nd consecutive quarter of year-over-year growth and with record sales of $4.3 million in the fourth quarter. And that has led to continued progress on a yearly basis of our sales of $13.4 million in CytoSorb sales. What we like to say is that our company, unlike many of the medical device companies that you'll see and in fact unlike a lot of the biotechnology companies that have a very binary event pending regulatory approval
and have no sales and are burning through cash.
We are a unique blend of growth and profitability targeting rapid growth and the achievement of operating profitability which excludes noncash expenses in clinical trial cost on a quarterly basis later this year. Why? CytoSorb is a high clinical impact need to have device that help save lives which justifies usage, strong average selling prices and reimbursement as we've seen in Germany already. As a high margin disposable CytoSorb drives a very highly profitable business model. It is a mixed revenue model combining our direct sales force, with the sales force of our distributors and partners, that helps keep our organization lien and our fixed cost low.
And last but not least, we manufacture CytoSorb directly at our facility in New Jersey. All the reduction in COGS, the volume manufacturing effects that we get from expanded sales, all those benefits come down back to us in terms of a reduction in cost of goods sold. And we can expect to continue a significant margin, product gross margin expansion as this new plant comes online. And after we achieve breakeven, operating profitability we expect that more than $0.50 on every dollar of sales will drop to the EBITDA line. So this has – this company has the potential to be a very cash flow rich company once we hit that target. And while we're targeting operating profitability this year, true GAAP profitability is within our sights in the next couple years as well.
So in the United States, we are targeting U.S. approval. This is important to many investors and it is important to us, because it is a very large market. We know that heart disease is one of the leading killers around the world and the numbers of people with heart disease continue to grow as the aging baby boomer generation ages. These people are going in for heart valve replacements, CABG, aortic reconstruction, heart lung transplants and many other very invasive surgeries. The problem with complex cardiac surgery is that it produces a lot of inflammatory mediators, free hemoglobin from hemolysis, activated compliment from blood touching foreign surfaces, activation of cytokines, et cetera.
This inflammation leads to post-operative inflammation that then leads organ injury and organ failure. And if that is something that we can prevent, that would be a very important thing. Let me give you an example. Kidney injury, very common in complex cardiac surgery. About a third of patients will develop some level of acute kidney injury following cardiac surgery. Studies have demonstrated that even mild acute kidney injury, mild impairment of the kidneys is predictive of one-year and five-year mortality and the progression to chronic kidney disease requiring dialysis in the future. So if we can prevent kidney injury that would be very important. Turns out that the inflammatory mediators that we are reducing like free hemoglobin and others play an important role in the development of this acute kidney injury. And that leads us to REFRESH 2 acute kidney injury trial.
REFRESH 2 is going to evaluate the use of CytoSorb intraoperatively in critically ill – in cardiac surgery patients undergoing valve replacement surgery, as well as aortic reconstruction with hypothermic cardiac arrest. These are patients who have a very high level of inflammation. We measured that in our REFRESH 1 safety feasibility study. Some of the groups are at highest risk for developing kidney injury. This is a trial protocol that has been approved by the FDA. It is in up to 400-patient, 20-patient to 25-patient randomized, controlled PMA trial in elective, non- emergent patients undergoing valve replacement in aortic reconstruction. And it is either CytoSorb or no CytoSorb during the treatment – during the surgery and that's it, that's the only intervention.
And then in the post-operative period while they're in recovery in the ICU, we're just measuring blood labs, urine labs, and looking at the incidence of acute kidney injury and other organ injury such as failure to get off the ventilator, days in the intensive care unit, need for vasopressors and other things. So it's a fairly – we expect it to be a fairly rapid trial to enroll, a little slower than REFRESH 1, but still very rapid. And we expect to complete the study by 2019, with potential 2020 approval if we can get fast track approval for CytoSorb for cardiac surgery, which we believe that there is a precedence for this already from other companies that do not have their products approved by the way. That did not succeed in pivotal clinical trials. So this is a cost about $12 million, spread out over three years and we're working closely to get our first patient enrolled. We just got IDE approval in December and are ready to get our first patient in hopefully very soon.
So our company has been gaining broader industry accolades. We were the winner of 2017 Global Frost & Sullivan Product Leadership Award in Blood Purification. You can read a little bit of a quote from one of the analysts there, that we are surprisingly well-positioned to help solve two longstanding difficult and tightly linked fundamental problems with hospital medicine today, including high rates of death from common, critical illnesses such as sepsis that have no approved treatment and the resulting staggering cost of losses in critical care, that are financially crippling hospital networks and healthcare systems throughout the world.
And we are recognized on the 2017 Deloitte Fast 500 as one of the fastest growing North American companies across all industries in North America and we were seventh 21 medical device companies. We have a number of upcoming catalysts including continued growth in international sales. Operating profitability on a quarterly basis before the end of this year, we anticipate potential new partnerships and expansion of existing partnerships, execution of the pivotal REFRESH 2 study, publication of clinical and basic science data, as well as greater investor awareness through investor meetings, conferences, non-deal roadshows.
So to summarize, CytoSorbents is strongly positioned, we believe and on track to have strong growth in 2018. We believe we are an established, well-run U.S. medtech, but with a biotech profile nearing critical mass. We’re strategically positioned in addressing some of the largest, most visible, unmet medical needs worldwide in critical care, cardiac surgery, cancer immunotherapy and others. We have a very potentially highly profitable razorblade in someone else’s razor business model. We are already showing very attractive and healthy gross margins. We have significant CytoSorb sales growth, and expected gross margin expansion and near-term operating profitability. We have excellent validation by customers, strategic partners, and government agencies for our technology. We are undiscovered by most investors, but positioned for broader awareness. And we have visibility on multiple exits for investors.
So with that, let me thank you very much for your attention. I'm happy to take some questions here we have a little bit of time. We also are in a breakout session for the next 40 minutes or so. Next door in Salon A. So thank you very much. Are there any questions?
Q&A
<Q>: [Question Inaudible]
<A – Phillip P. Chan>: Yes, so in our discussions with the FDA, the question was what do we need to show? So our primary endpoint there is their reduction in the severity or incidence of acute kidney injury following cardiac surgery. This is measured by the KDIGO criteria kidney disease for improving global outcomes, a criteria well accepted by the medical community as well as the FDA and showing a reduction in this failure or incidence of the acute kidney injury at 48 hours post surgery.
<Q>: [Question Inaudible]
<A – Phillip P. Chan>: So what percentage of reduction are we expected to show? We are expecting to show somewhere on the order of a 10% to 15% reduction in absolute numbers. Another question.
<Q>: [Question Inaudible]
<A – Phillip P. Chan>: Well I think that one, if we were a standalone company we believe that we could be a very highly profitable business, again a very cash flow rich business based on our highly profitable razorblade and someone else's razor business model. We believe that that will be very well valued in the marketplace, because it is a very unique position to be in. Again a lot of medical device companies that you'll see have high growth, but also lose more than what they sell. We are not that way, we believe that we will actually be able to show the underlying profitability.
So that opens up a wide variety of different options for us either to stay independent, have the stock market value us the way that it will, but it also potentially opens up the potential M&A in
the future either via strategic partner or by a private equity group that likes the cash flow business, right. So I think it's kind of a potentially nice position to be in, particularly if we can continue to execute. Yes.
<Q>: [Question Inaudible]
<A – Phillip P. Chan>: Yes, in Europe today none of these products by the way are approved yet in the United States. But in the European Union there are really three classes of products. There are – we are the leader in blood compatible sorbents, so beads that can touch whole blood directly without causing hemolysis. This again is platform agnostic. We are the leader of blood purification for sepsis in Europe today, we believe.
The second product is a blood incompatible sorbents. Hemolife and Bellco are two of the manufacturers of such devices. Those devices only work on their machines, it requires a system of three cartridges of plasma separation of whole blood into the cells and plasma. Then they treat the plasma with their sorbent and then they have a third cartridge that puts it back together again. They have very low ability, a low flow rate, so very low and ability to filter blood in a low way. It's very interesting the CSO, Chief Scientific Officer and the President of Bellco, the leader of CPFA this non-blood compatible sorbents. They actually left Bellco, formed their own distributorship called Aferetica. Aferetica is our distributor CytoSorb in Italy today.
And then the third category really membrane-based devices like chemo filters and hemodialysis membranes with big pores, traditionally they have not worked. And Fresenius and Baxter/Gambro have them. I think Baxter is pushing in the market right now with a new product, but we’ll have to see how they do. We don't believe that those will be successful either. The first ones that they launched were in 2009 and are no longer use in the marketplace widely today.
So I think we're out of time. We'll be in next door, if you're willing to follow us over there. Happy to answer any other questions that you have. Thank you very much.
