16:33: StemCells, Inc. (STEM) Q4 2013 Earnings Conference Call March 12, 2014 4:30 PM ET

Gregory T. Schiffman – Chief Financial Officer and Executive Vice President Martin M. McGlynn – President, Chief Executive Officer and Director Stephen Huhn – Vice President, Head of the CNS Program

Keay T. Nakae – Ascendiant Capital Markets LLC Stephen M. Dunn – LifeTech Capital Jason H. Kolbert – Maxim Group LLC

Good day ladies and gentleman and thank you for standing by and welcome to the Fourth Quarter 2013 StemCells, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder today’s conference maybe recorded. It’s now my pleasure to turn the floor over to Chief Financial Officer Greg Schiffman. Sir, the floor is yours.

Thank you. Welcome everybody and thank you for joining us today. With me today are Martin McGlynn, our President and Chief Executive Officer, Dr. Stephen Huhn, our Vice President of CNS Clinical Research. Before I 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 earning release, which you’re encouraged to consult. Now with that I will turn the call over to Martin.

Well, thanks Greg. And thanks to everybody for joining us today. So I want to start off by reviewing our accomplishments over the last year, after which Dr. Stephen Huhn, will provide an overview of our clinical plans for 2014. Greg will then review our financial results and I will close with some final thoughts. Following these prepared remarks, we will then open up the call for Q&A. So when I look back over 2013, and the start of 2014, I am proud of the continued progress we have made towards our goal of bringing a truly disruptive therapeutic to the clinic for a broad array of diseases and conditions affecting the CNS. StemCells has been the industry leader in neural stem cell research and development, starting with our innovative discovery of a purified, expandable population of human neural stem cells in the year 2000. We have established a strong base of intellectual property surrounding human neural stem cells, and in 2013, we further strengthened a patent portfolio with the outright acquisition of previously licensed patents from NeuroSpheres Holdings. In addition to the acquisition of a number of patents from NsGene, which complement our portfolio. The patent portfolio from NeuroSpheres, which was based upon the groundbreaking research by Samuel Weiss and Brent Reynolds at the University of Calgary, has repeatedly been recognized as the seminal intellectual property pertaining to purified populations of human neural stem cells. So today, we have the broadest and the deepest IP portfolio of any company in the neural stem cells space. So turning now to 2013 milestones, we have achieved many. So let me just start by discussing our work in spinal cord injury. We expanded the Phase I/II study in thoracic spinal cord injury from Switzerland into Canada and then into the United States,…

Thank you, Martin. As we have indicated, we expect to complete enrollment in our current Phase I/II trial and thoracic spinal cord injury this month. We have previously reported 12-month results in the first three patients in the study, with further enrollment and subsequent follow-up now available, the consumer investigator from Zurich, Dr. Curt will be presenting an interim update based on minimum of six month data for the first six subjects at the upcoming American Spinal Injury Association conference this May. We planned to provide another interim update for our 12 patients later this year, and we’ll release final data on the study next year. Experience to date in the ongoing Phase I/II study and thoracic spinal cord injury supports further clinical development. And we’re therefore planning to initiate a Phase II randomized control study and spinal cord injury mid-year, which should complete enrollment in 2015. The Phase II protocol will include cervical spinal cord injury and will be specifically designed to measure evidence of direct efficacy in order to establish proof-of-concept for this approach. The study will definitive and well recognized clinical endpoints and will be powered to achieve a statistically significant outcome. As Martin indicated the Phase II study will be the first test of StemCells for injury involving the cervical spinal cord. If I may injury to the cervical spinal cord in our results in loss of both arm and leg strength. And as we have said accounts for almost two-thirds of the spinal cord injuries as a result of this trauma patients with cervical injuries on much less function independently, and they’re typically unable to manage many activities of daily living. However, cervical injury represents a patient population and in a small gain in motor strength could result and improved upper extremity function with the…

Thank you, Steven. First, I want to say how excited I am to be a part of this management team. As Martin and Steven had indicated, 2013 was a very successful year for StemCells. In 2013, we’ve made substantial progress in our clinical development efforts, as well as completing the build-out and validation of our manufacturing facility, all while keeping tight control of our cash burn and strengthening our balance sheet. I’m going to speak mainly to the full-year results and if there are specific questions you have about Q4 and we can cover those in the Q&A session. In 2013, total revenue was down slightly year-over-year, a total of approximately $165,000. Licensing revenue was down year-over-year, primarily due to a one-time fee from a license agreement with genOway, which was booked in 2012. Our SC Proven sales increased 17% in 2013 to approximately $1 million. We see opportunities for the SC Proven business and expected to see continued growth in the revenues. Operating expenses were up year-over-year by approximately 25%, about $5.8 million. This increase reflects increased enrollment in the ongoing Phase I/II trials and preparation to initiate the Phase II efficacy proof-of-concept studies, Steven discussed earlier. Similarly, loss from operations increased by approximately 27% or approximately $6.1 million driven by the $5.8 million growth in operating expenses. For the full-year 2013, we reported approximately $2.2 million in net other income below the operating lines. This has comprised of approximately $3.3 million of income associated with the change in the fair value of our warrant liability. This is a non-cash income item driven by change in the value of our stock price. Just a reminder, under warrant liability accounting an increase in share price leads to an increase in the warrant liability, while the decrease in share price leads…

Thank you, Greg. Well hopefully I convey to you what I believe will be a transformational year for StemCells, Inc. or completing our Phase I/II studies and embarking on much larger clinical trials with hard clinical endpoints that are focused on efficacy. This is the culmination of 13 years of painstaking methodical research. We have continuously been pioneers in the field of human neuro stem cell science and that leadership continues this year with our plans to be the first company to treat the cervical spinal cord injury patient with StemCells. We’re the only company with a pipeline of products that encompass the entire CNS system including the brain, eye and spin. We will release more data on new patients this year and we have since we begun our clinical programs in 2006. We plan to treat as many patients this year as we have since we began our clinical trials back in that same timeframe in 2006. Next year, we will see the patient volumes increase substantially again. For the investors on this call, that should translate into much better insight into the capabilities of this technology in the near-term and within the next 2 to 2.5 years final results from two Phase II controlled proof-of-concept efficacy studies. And on top of this we’re looking to file an IND for Alzheimer's disease in 2016. So hopefully you can see why I’m so excited about our prospects going forward. In conclusion, before we start the Q&A, I want to let you know that we’re not planning to announce additional details of either trials protocol design after we received an FDA green light to proceed. We can say that the patients enrolled will be representative of the patients that we intent to treat. The trials will have hard clinical endpoints, that will be statistically powered to demonstrate clinical benefit and they will be blinded trials. So with that, I would now like to open the call for questions.

Thank you, sir. (Operator Instructions) And it looks like our first phone question will come from Keay Nakae with Asciendiant. Please go ahead. Your line is now open. Keay T. Nakae – Ascendiant Capital Markets LLC: Yes, thank you. My question is, as we think forward about the spine study and cervical spine injury. Can you give us a sense of what that patient population who in you are thinking would be eligible for the study might look like and also the ability to enroll a study that had a docetaxel patients and how quickly or easily or challenging doing that type of a patient population study would be?

Okay. First of all the protocol and the study is targeting cervical spinal cord injury patients, which as we’ve mentioned represents about two-thirds of thoracic spinal cord injury. So the number of patients with cervical spinal cord injury is significantly greater than the number of patients out there with thoracic spinal cord injury. Our planning would suggest that we would be able to enroll the patients that are needed for this study within about 12 months of initiation. And secondly, as you know, with the thoracic spinal cord injury study, we were limited to one site in Switzerland, where we tell us [ph] I think it was nine patients out of the 11 that have been dosed to-date. Whereas going forward, we will have at least 10, if not more, sites that will be enrolling in the cervical spinal cord injury. So more sites, greater incident to patients, and a track record in terms of knowing how to interact with this patient population, and how to handle the logistics. Does that help? Keay T. Nakae – Ascendiant Capital Markets LLC: Yes, it is helpful. And just as you think about sites, obviously, there is centers of excellence that know how to treat these patients, just geographically, is there anyway to kind of match up where they are located versus the – again just thinking about the logistics and the ability to get the right patients to the right centers to enroll them into your study?

Right. So, all right, I forgot to add earlier on in answering first part of your question that we will be targeting to enroll patients cervical spinal cord injury classified as AIS A, Bs and Cs. With regards to patient centers, our game plan is to conduct the study in North America and to the United States and Canada. The sites that we’re targeting roughly approximate to centers of density of population and well distributed throughout North America. So that the amount of travel time in the logistics and access to the centres, this dramatically reduced and less taxing on the patients and their families. Keay T. Nakae – Ascendiant Capital Markets LLC: Okay, well we look forward do you guys moving into that Phase of the study and just I want to say its see that the enrollment since finally you’ve started to move in your favor?

Thank you. Thanks Keay.

Thank you, sir. And it looks like our next question will come from Stephen Dunn with LifeTech Capital. Please go ahead. Your line is open. Stephen M. Dunn – LifeTech Capital: Hey guys, thanks for taking my questions and congratulations on a great 2013.

Thank you. Stephen M. Dunn – LifeTech Capital: I just had some housekeeping questions you’ve thorough and multiple costs. I guess just a bit of final point on the PMD progress going-forward. Have you decided to definitively do a third proof-of-concept or you are still debating whether to do anything at all?

At this stage, our priority in our planning and our resources on getting the Phase II studies in spinal cord injury and AMD up and running. We continued to look for ways and means that we can hold in a third Phase II study i.e. the one in PMD, but quite frankly with limited resources for human and financial. I think that will be a challenge for us to hold in a third program in 2014. But having said that the data from the first study and we’re leasing more data to three year timeframe is very, very compelling and very encouraging. So, we definitely remain interested in advancing the program the challenge for us is prioritization and using limited resources. Stephen M. Dunn – LifeTech Capital: Great, on the cervical spinal cord program I recall CIRM had granted you a $20 million loan that about year-ago you passed off [ph]. Do you anticipate that coming back or you’re doing this fully without the CIRM funding?

Steve the CIRM award again in the form of a capable loan was to fund – was to fund pre-clinical activity in the field, focusing more or less on cervical spinal cord injury. We’ve managed to advance the program beyond the preclinical area of investigation as you’ve heard the Phase II protocol that we will be submitting to the FDA will include cervical spinal cord injury. So the plan of the company is to fund that Phase II proof-of-concept study from its own resources. Stephen M. Dunn – LifeTech Capital: Okay. Alzheimer's I know you don’t want to talk about clinical trial design that’s very early in the game right now, do you I’m going to ask you anyway, do you anticipate the initial trials to be in patients with severe Alzheimer’s or mild to moderate. In other words you feel at this stage the FDA is going to make you – it is the end stage patients that they have in PMD and NCL?

Well, that’s an open question. I mean obviously, let me tell you what our preference would be, I mean our preference would be to do the earlier studies in the mild to moderate patient population. What we’re looking here is that memory and performance of memory. We’re not looking to change the pathology of the brain with the Alzheimer's brain. Earlier on the FDA was in a very hypersensitive mode with regards to safety and I think we’ve seen slow, but sure sense of – greater sense of assurance about what we’re doing to sales and how we go about doing our business. : In each case that was the regulatory paradigm means to be seen how the FDA will respond to the data that we started to generate. And we’ll be further along in terms of clinical trials in human data by the time we get to file an IND. So it will be an interesting conversation. : In each case that was the regulatory paradigm means to be seen how the FDA will respond to the data that we started to generate. And we’ll be further along in terms of clinical trials in human data by the time we get to file an IND. So it will be an interesting conversation. : In each case that was the regulatory paradigm means to be seen how the FDA will respond to the data that we started to generate. And we’ll be further along in terms of clinical trials in human data by the time we get to file an IND. So it will be an interesting conversation. Stephen M. Dunn – LifeTech Capital: Yes. My question was really driven by the fact that FDA is under pressure have some kind of therapeutic for Alzheimer's and has been so little promise for candidates out there. So that’s what they might?

No, I think that’s right. That’s absolutely right Stephen, again there is a great need, there is a tsunami building up with the demographics and the potential that this disease has in terms of breathing habit not just on patients and their families, but also in the healthcare system and the cost of managing Alzheimer's patients. So we’re – we will obviously hope to be beneficiaries of that when we do get around to agreeing the protocol that the FDA as part of the IND filing procedure. Stephen M. Dunn – LifeTech Capital: Yes. Great. One last question I will jump back in the queue. You stated your CGMP facility is now, sufficient to that you require no third parties support now and that those are all ended everything you do, we do in house now?

That’s correct. Stephen M. Dunn – LifeTech Capital: Well. Great, congratulations. All right thanks so much guys and looking forward to a great 2014 and onward.

Thank you.

Thank you, Steven.

Thank you, sir. (Operator Instructions) Next questioner in queue will come from the line of Pamela Bassett with Maxim Group. Please go ahead, your line is open. Jason H. Kolbert – Maxim Group LLC: Hi, it’s Jason Kolbert in for Dr. Bassett at Maxim. Hi guys how are you?

Fine, how are you? Jason H. Kolbert – Maxim Group LLC: Thank you. I just want to touch on manufacturing a little bit, so probably a little bit about the difference between clinical manufacturing and commercial manufacturing and where you think COGS might go long-term. And it’s specially since you have in such expert CFO has got too much experience in this area. So and helps us understand the value proposition as you look towards to commercial scaling.

Sure. And thank you very much for leaving there Jason. When I look at the COGS I mean that’s an area where I just started having activities with the team. We clearly, this is one that you have an awful a lot of infrastructure that you do have an ability to leverage there is a lot of activities that are important for us as we move this forward. So clinically you could imagine the volumes certainly far or less than what we looking for – as when we move forward commercially and from that standpoint the process engineering that I think Martin talked about that we are making – looking to make investments in, some activities with automation that will definitely yield some fairly substantial decrease and a lot of leverage in the infrastructure that we have. I think it’s early for us to give a specific estimate in terms of where we think COGS are going to end up but that being said, this is a process that, it’s an off-the-shelf type of a product, its once that we believe is very scalable and we have a lot of activities underway to ensure that we can scale this very cost effectively, Martin I don’t know if you have anything else, you want to add.

Yes, I mean essentially that the way you do business and with biologics is that your process has to meet the guidelines that are appropriate for your stage of clinical trial activity. So we are currently in full compliance with cGMP, guidelines, as we move forward into the pivotal studies, beyond the Phase II studies, that we are currently talking about for this year, your process has to become more tightly controlled and meet even tighter regulations as we move forward all the way through to a final BLA. I mean we are currently operating at what you would describe as a pilot scale level, but the process is very scalable and it would be a little bit of a waste of exercise to talk about cost of goods, from a pilot scale with single center, small numbers open label studies, you know to multi national, multi center larger numbers of trial. So it’s a scalable process, and it’s in area where we management recognize that we will have to continue to invest in, as we move closer and closer to regulatory approval to market our COGS. Jason H. Kolbert – Maxim Group LLC: Thanks, Martin and that’s a great lead into kind of the next direction, which is as you are now on the precipitance really substantial proof-of-concept data and what point you would take a look at bringing a partner in where its big pharma or big biotech to understand what the pivotal requirements would be as a result of kind of this early proof-of-concept data.

Well, you know – for, we have funded out of our activities with shareholder investment and I think it’s fair to expect that real partnering opportunities and real value creation, that kind of come together concurrently when you have got data from well controlled studies, of the time that we are going to initiate this year. So I think the data will do the topping I think the data will be the deciding factor in terms of the interest of potential partners. I think it would be fair to say that, over the years, we’ve had conversations with potential partners both who have shown interest in what we are doing and vice versa. So it’s not like we’re completely blinded and we haven’t ever had any conversations with potential partners. These conversations go on notwithstanding the fact that quite honestly everybody really wants to see data from well controlled studies before they can price the risk and price the value if you will. Jason H. Kolbert – Maxim Group LLC: Thank you, Martin, thank you Greg, look forward to the…

Thank you.

Thank you. (Operator Instructions) And presenters at this time I’m currently showing no additional phone questions in the queue. I would like to turn the program back over to Martin, for any additional or closing remarks.

Thank you, again, and thanks to everybody for joining us today for our quarterly call, and I look forward to updating you on our clinical progress as the year proceeds. Thank you all.

Thank you gentlemen, and thank you ladies and gentlemen. Again, this does conclude today’s call. Thank you for your participation and have a wonderful day. Attendees you may log off at this time.