Cytosorbents Corporation (CTSO) Earnings Call Transcript & Summary

Good afternoon. I'm Josh Jennings from the medical devices team, representing Neil Chatterji, Brian Kennedy and Eric Anderson as well. We're moving through the medical devices track here at the 41st Annual Cowen Health Care Conference, and we're excited to have the Chief Executive Officer of CytoSorbents, Dr. Phil Chan, joining us today. We're going to -- he's going to run through some introductory slides for investors that are new to story and provide some updates, and then we'll move right into the Q&A. Phil, I'll hand it right over to you. Thanks so much for being here.

Yes. Absolutely. And thank you very much, Josh, for the invitation. So I am Dr. Phillip Chan. And before I start, let me please remind viewers our safe harbor statement for forward-looking statements. CytoSorbents is leading the prevention or treatment of life-threatening inflammation and cytokine storm in the intensive care unit as well as in cardiac surgery using our CytoSorb blood purification technology. The heart of the technology is based on a highly porous polymer bead, roughly the size of a grain of salt. Each of these beads acts like a -- has millions of pores and channels in them that allow them to act like tiny sponges that absorb inflammatory toxins from the blood and bodily fluids very efficiently. This is a technology that is patented with 16 issued U.S. patents and multiple patents issued around the world and pending worldwide. And we manufacture this at our is ISO 13485 certified manufacturing facility in New Jersey. We have developed many different products in our pipeline with internal development funds as well as supplemented by strong government support to the tune of nearly $38 million in grants, contracts and other nondilutive funding from the U.S. government from the likes of DARPA, NIH, NHLBI, U.S. Army, Air Force and many others. Our marketed products include CytoSorb, which we'll talk more about today, but it also includes a product that we got approval for last year in the European Union called the ECOS-300CY cartridge for ex vivo organ perfusion for transplant. And we also are marketing VetResQ, which is similar to CytoSorb, but for critical illnesses in the animal health market. Under development are a number of different products, again, that have been funded by the -- a lot of it has been funded by the U.S. government, including HemoDefend-RBC, which is a filter used to purify packed red blood cells of noninfectious contaminants that can cause transfusion reactions. We also, last year, announced the award of more than $8.5 million in contracts from the U.S. Army for the development of HemoDefend-BGA, which is designed to enable universal plasma as well as to reduce -- improve the safety of whole blood transfusions. We are also developing with our own funds, our next-generation CytoSorb device called CytoSorb-XL. With also government funding, we are funding -- we are developing a product called K+ontrol to treat severe hyperkalemia with an absorptive device. We also have 2 other products on our pipeline. One is ContrastSorb, which is capable of removing IV contrast used in CT imaging and interventional radiology procedures with high efficiency; as well as drug DrugSorb, which can remove a wide range of drugs that are often associated with drug overdose. The nice thing about CytoSorb is that it is plug-and-play with the existing blood pump infrastructure today, whether or not it's a CRT or dialysis machine, in the intensive care unit, an extracorporeal membrane oxygenation machine in the intensive care unit. This is a machine that can oxygenate blood outside the body when mechanical ventilation fails. It's been used quite widely in COVID-19, for example, as well as in cardiopulmonary bypass circuits in open heart surgery. At a glance, we're a rapidly growing New Jersey-based NASDAQ traded medical device company. CytoSorb is EU approved and commercialized now in 67 countries around the world as an extracorporeal cytokine absorber to help treat deadly inflammation where cytokines are elevated, otherwise called a cytokine storm. Overall, we've shipped more than 121,000 devices to date. We've also treated more than 5,000 COVID-19 patients across 30 countries, including here in the United States under FDA Emergency Use Authorization for use in critically ill COVID-19 patients with respiratory failure. CytoSorb is also EU approved to remove bilirubin, which enables us to be used as a liver dialysis therapy, a great area of potential future growth for us; myoglobin in trauma. And also something we'll focus on today is the removal of blood thinners specifically Brilinta, also called ticagrelor; and Xarelto or rivaroxaban during cardiothoracic surgery. CytoSorb is on a dual path to potential U.S. FDA approval. The first path is through this removal blood thinners during emergent or urgent cardiothoracic surgery that targets a $250 million total addressable market in the United States, just to start. We think that this can grow to become a $1.5 billion total addressable market potentially for other blood thinners as well. And then the U.S. REFRESH 2-AKI trial, a 400-patient pivotal study looking at the use of CytoSorb intraoperatively during high-risk cardiac surgery as a way to reduce the risk of postoperative acute kidney injury, which is associated with 5-year -- up to 5-year mortality. And then last but not least, we are partnered with some of the leading players in the world, including 2 of the largest dialysis -- 2 of the 3 largest dialysis players in the world, including Fresenius Medical Care. And yesterday, we announced the partnership with B. Braun; and then also with Terumo Cardiovascular, one of the largest dialysis companies -- one of the largest cardiac surgery disposables companies in the world; and Biocon, the largest biotechnology company in India. We also, in January, pre-announced Q4 2020 and full year preliminary unaudited financials. Just to remind viewers, we sell through a hybrid sales model, where we sell direct in 10 countries and then sell through distributors and partners in 57 other countries. But again, we surpassed 121,000 treatments, up from a cumulative 80,000 at the end of 2019. So 50% growth in the total number of treatments we've ever shipped. 2020 total revenue was $40.8 million versus $24.9 million in 2019. And importantly, we approached nearly $40 million in product sales in 2020, a 73% increase over 2019. And in the fourth quarter was another record quarter for us with $11.5 million in product sales, a 74% increase from $6.6 million a year ago. And last 2 couple of bullets is that preliminary blended product gross margins are expected to be greater than 80% in the fourth quarter. That makes us higher-margin direct sales and lower-margin distributor and partner sales. And our cash balance at the end of the year was approximately $71 million with no long-term debt. This is just a graph of our sales progress. You can see strong consistency in our sales. And in fact, an acceleration of growth in 2020, partly related to COVID-19. And again, a 70-plus percent increase in product sales with gross margins approaching 80%. So one of the questions that we often get from investors is what is the U.S. opportunity. And again, as I mentioned before, I'd like to focus in on this blood thinner application, which, in fact, has nothing to do with inflammation or cytokines for that matter, but it just involves the ability to remove blood thinners. Every year, millions of people around the world are taking blood thinners to reduce their risk of stroke and heart attacks by thinning the blood. Ticagrelor is often used in patients going in for cardiac catheterization who have signs and symptoms of having a heart attack with $1.6 billion in worldwide sales. And rivaroxaban, or Xarelto, a $7 billion in worldwide sales as another leading blood thinner. The problem with these blood thinners is that they often cause unwanted bleeding in patients who are undergoing urgent or emergent cardiothoracic surgery procedures. And the nice thing about CytoSorb in cardiothoracic surgery is that we can -- we are installed easily into the heart-lung machine. And during the surgery, while they're having their urgent or emergent surgery, we're removing the drug so that postoperatively, they don't look like that they're on the drug at all, and we've reversed the anticoagulant effect. We believe that CytoSorb can quickly become a cost-effective standard of care to prevent bleeding due to antithrombotics, helping to drive sales growth. To give you an idea of what this bleeding looks like, this was the registration trial for ticagrelor, also known as Brilinta, one of the leading antiplatelet agents used in dual antiplatelet therapy for people coming into a hospital with signs and symptoms of having a heart attack. And you can see that if they have to -- so it turns out that, although most people will have a stent put in or some other type of angioplasty to eliminate the blockage, up to 5% to 10% of patients who get -- who come into the hospital with signs and symptoms of a heart attack will not be eligible for a stent and will need to go in for emergency cardiac surgery. And if they have to go in within 1 day, 2 days, 3 days, et cetera of having their last dose of this drug, they have a very high risk of having major fatal or life-threatening bleeding. 65%, if they have to go within the first day, and that risk is still 50% of a life-threatening bleed even after multiple days of stopping the drug and washing out that drug. So what a seminal study showed in Germany is that with the use of CytoSorb in these patients that there is a very marked reduction in the procedure time of more than an hour on the table because of less need to try to stop all this unwanted bleeding. There -- far fewer patients needed red cell or platelet transfusions on the left-hand side here. The chest tube drainage was significantly lower at 350 CCs in 24 hours versus 890 CCs or mLs in 24 hours. That is a reflection of bleeding. None of the patients had to go in for a exploration surgery called rethoracotomies, whereas 36% of patients that did not get CytoSorb had to go in. And that resulted in fewer days in the ICU and fewer days in the hospital in general. And when a U.K. health economist who advised NICE in the U.K. did an analysis on the projected cost savings based on these data, they projected that including the cost of the device, they would have saved about $5,000 per patient if they had just used the device. And that's one of the reasons why NICE actually issued a medical innovation bulletin, MedTech Innovation bulletin that summarized these findings, which was a very positive thing for us. So in the United States, the total addressable market initially for ticagrelor removal, we -- based on solid data, there are approximately 50,000 patients in this exact boat every year in the United States. And at $5,000 a device, that's a $250 million initial total addressable market that we think that we can capture very rapidly. And then as -- given that ticagrelor is the only antiplatelet that is now reversible, we are the only reversing agent of that, that is approved in the European Union today. That if we get that approved in the U.S. as well, that ticagrelor market share is expected to grow. And that ticagrelor also goes off-patent in 2024, that will lead to a drop in prices that will then allow it to displace Plavix, which is currently competing based on price alone. And that would grow the overall market to $500 million, we believe. So that sets the stage for the U.S. In the springtime of 2020, the FDA granted us Breakthrough Designation to remove ticagrelor during emergent or urgent cardiothoracic surgery, which is essentially a fast track, recognizing the major unmet medical need. And we expect to have more clarity very soon on the U.S. regulatory path forward that is consistent with Breakthrough Designation status. We also recently hired a head -- Vice President of Global Regulatory, David Cox, from the well-known Integra LifeSciences, and who will be leading the regulatory charge for the U.S. And also recently hired James Komsa, a seasoned executive from Medtronic, who actually led their -- as Vice President, led their Restorative Therapy Group, RTG and Pain divisions and also formerly led their Cardiac and Vascular Group divisions as well. And then last but not least, a new CMS approval of a special program called the Medicare Coverage of Innovative Technology's act now establishes automatic national Medicare coverage for breakthrough devices for up to 4 years, which is going to help break down a major barrier to adoption in the United States, we believe. So if we can grow this market from just ticagrelor removal in cardiac surgery to now ticagrelor and NOAC, or novel oral anticoagulant; or DOAC removal in cardiac surgery; and then to all surgeries, potentially, like orthopedic and other high-risk surgeries, we think that in the United States, we might have a total addressable market that might approach $1.5 billion. So in summary, we believe that we have the ability to become a highly profitable, elite performer in the therapeutic space with industry-leading operating profit margins, a razor blade business model in other people's razors, strong foundation and well funded for potential future growth, working to drive U.S. FDA approval and this -- leveraging our Breakthrough Designation for ticagrelor removal with extensive validation from physicians, leading strategic partners, the U.S. government and the media from around the world and a lot of potential near-term catalysts. So with that, Josh, thanks very much for giving me an opportunity to summarize the company, but happy to answer any questions you might have. I think you're on mute.

Thanks a lot. Can you hear me okay?

Yes.

Great. Thanks for that presentation. Congratulations on the continued commercial success and all the progress on the clinical development front as well. COVID-19 is on the front of everyone's mind and just impact on elective procedures, but CytoSorbents has been one of the few stories where a new indication has popped up, and you did receive that EUA approval in -- back in 2020. But maybe you can just provide us an update. I mean the path to accumulating clinical data for severe COVID-19 patients, can you just remind us of that? And then could we see results and could data drive a formal regulatory approval outside of an EUA for the severe COVID-19 indication at some point?

Yes. I think that we've learned a lot over the past year about who to treat and how to treat. What we've learned is that inflammation predicts the severity of illness and actually mortality in the disease. Those with high levels of inflammatory mediators often do very poorly. But what we've also found out is that the timing of intervention as well as the patient profile is really critical, that if you intervene too late, for example, waiting for weeks, a patient to be on weeks of mechanical ventilation, that's not the time to intervene. The time to intervene is really early where you can try prevent the downstream complications of this overwhelming inflammation. And that's where we've seen, routinely, a reduction in inflammatory mediators, a stabilization of hemodynamics and improvement in oxygenation that has often led to weaning off of mechanical ventilation and ECMO. And actually high reported survival in many case series from around the world on the order of 70% to 90% in both CRT as well as in ECMO. In the United States, we have been very careful about trying to train centers on how to use the therapy and when to use the therapy. And we are collecting data under what we call the CTC registry, or the CytoSorb and COVID-19 patients registry, and in particular, with ECMO. And the survival from a multicenter analysis so far looks actually quite promising with survival that exceeds what is being reported by ELSO, which is the Extracorporeal Life Support Organization that has a registry that collates ECMO treatment data from COVID patients from around the world. And so I think that that's been very encouraging. One of the concepts with CytoSorb and ECMO is that early use of -- so I can take a very healthy person and put them on toxic levels of oxygen and toxic settings on the mechanical ventilator and destroy their lungs in days. Being on a ventilator is very dangerous. And by intervening early with ECMO, that takes gas exchange offline out of the body, kind of like a heart-lung machine. That allows you to rest the lungs, but simultaneously adding CytoSorb to remove the circulating inflammatory toxins that are caused by COVID-19 that are causing ongoing injury to the lungs. That, that lung rest strategy is really the key to potential treatment of ARDS. So to your question about where we're going with this, we already have EUA authorization, Emergency Use Authorization, to treat severe COVID-19 patients. And that probably will not -- that will probably continue for the good part of this year as we deal with variants and other potential dangers going forward even with the vaccine out there. But I think that what we're trying to do is create a new paradigm for the treatment of acute respiratory distress syndrome. That's about 0.25 million people every year in the United States alone and is a major unmet medical need, and we think that this lung rest strategy could potentially be one way to accomplish that.

Excellent. And then just introducing CytoSorb into the United States through the EUA, you have created some U.S. partnerships, and you also have many critical care physicians who have direct clinical experience with CytoSorb. I mean how big of a deal do you think that is as you move down the line to approvals for other indications outside of severe COVID-19 with just kind of seeding the clinician base and the critical care clinician base in the United States?

Yes. I mean, I think it's been really great. As you know, most of our commercial activity has been outside of the United States. Most of the clinical -- all of the clinical data, except for the clinical studies that we've done here in the U.S., have been outside. And what we faced at the beginning of the COVID-19 pandemic was really a lack of awareness of our product. I mean, certainly, there were -- we had hundreds of hospitals actually call in at the beginning of the pandemic. But compared to the thousands of hospitals that are out there, we were relatively unknown. And I think what we've done a nice job in is really educating the market about what CytoSorb is and what it can do. And a lot of the folks that we talk to are cardiac surgeons who run ECMO programs. And although we don't talk about the blood thinner removal application, they've heard about it. And it's exciting that when we've approached them about potentially being clinical trial centers or, et cetera, that the enthusiasm is very strong for that particular application. In Europe, we've had fantastic response in the blood thinner application. And again, it's a matter of just creating awareness for it.

Excellent. I wanted to ask about just the announcement this week, the partnership with B. Braun and them kind of marketing the combination of their acute renal replacement therapy system with CytoSorb. It sounds like another strong partnership in the dialysis -- with -- in the now 2 of the 3 biggest dialysis players partnered up with. But can you maybe just give me a chance to help investors understand the meaning -- how impactful this partnership this could be.

Yes. B. Braun is a major player in critical care in Europe. It's not just dialysis, as you mentioned. But it is also in a wide variety of critical care products, blood infusion, drug infusion pumps and a wide range of products, so $7.5 billion in worldwide sales. And so they launched their OMNI blood purification platform, which is a very elegant platform. And the partnership of co-promoting CytoSorb as one of the leading technologies to purify blood of inflammatory toxics with the OMNI platform and doing this globally, with the exception of the United States, really has the potential to catalyze our sales. Now as you mentioned, our other major partner in this space is Fresenius Medical Care, the largest dialysis company in the world. And we've been partnered with them for many years and have recently expanded in Mexico, Korea as well as South America with Fresenius as well. But I think that, that represents tremendous validation for our technology, and also, obviously, essentially represents a direct path for growth internationally.

Excellent. And just any specifics just in terms of the size of their sales force that's going to be pushing OMNI along with CytoSorb? And will your direct sales force be cross-selling the B. Braun OMNI system? Or -- we assume it's just on the B. Braun side, but just wanted to make sure we're clear on that.

No, it will be both. And so...

Both of them.

Yes, B. Braun will be selling the machine, obviously, and all the disposables related to the machine. But we -- and our distribution network, our partners will be selling CytoSorb. And we will be co-marketing this at major conferences, medical conferences, for example. We'll be in their booth, they'll be in our booth, and the goal will be to, again, co-promote this broadly. We have a large number of countries where we're going to be focused on initially where we think that there'll be some really great synergy. And -- but that's routinely how we work with our partners also. Fresenius is a little different in that they have exclusive distribution rights to certain countries. And so in those countries, we -- they are -- will be our preferred partner.

Understood. You touched on in your presentation that the ticagrelor and rivaroxaban removal indications, very exciting, huge market opportunity you laid out. In Europe now on label, can you just talk about what the CE Mark -- can you talk about the commercial initiative that CytoSorbents has been employing to drive adoption for the indication? And how are you -- how successful you've been in these early days of driving adoption?

Yes. We just got approval -- EUA label expansion for ticagrelor, or Brilinta or Brilique, removal in January of last year. And then in May, we got rivaroxaban, or Xarelto, removal. But in the context of COVID-19, what we've seen is our sales reps -- and most companies have seen this as well, have not been able to get into hospitals. It's kind of wax and wane as the COVID waves have waxed and waned. But that being said, we really haven't felt the full impact of that approval in Europe where we can leverage that across all 67 or 66 of our countries except for the United States. And so we are looking forward to an end of COVID-19 where we can really get out there and market this heavily. Already in Germany, we're in the majority of cardiac surgery centers. We already have a very large cardiac surgery footprint, where about 1/3 of our overall usage is related to cardiac surgery. So once we're able to get out there and really push this application, we think that it can become a very meaningful contributor to our growth going forward.

Excellent. I know you don't have the regulatory time lines -- that you're not detailing the regulatory time line for U.S. approval for the ticagrelor removal indication. But maybe what are left in terms of next steps before -- with the FDA? And then kind of you can share with the investment community more details on those time lines and the path forward. I know the FDA is kind of backlogged with a lot of the pandemic stuff or administrative backlog, if you will. But should we -- I mean could we hear later this year an outline of the regulatory path in the U.S.?

I think you'll hear about that very shortly, very soon, in fact. Again, leveraging the FDA Breakthrough Designation, we've worked very closely with the FDA in a collaborative way and spent a lot of last year working to get them data to support what we believe is a low-to-moderate risk profile of the device. And so we'll have more information about the regulatory path going forward. But our focus is on really driving approval in the shortest and least burdensome pathway as possible to get approval for this in the United States. Again, a big unmet medical need, nothing out there to treat it today. And already, we're approved in Europe for this application, and we think that we can bring this home here to the United States to help people here in the U.S.

Just one more question on ticagrelor and rivaroxaban removal. Just thinking about the therapeutic -- there's some couple of therapeutics under development for this indication. Thinking about the -- I guess, the regulatory hurdle that the FDA put in place just in terms of the evidence hurdle, it -- as we dug into this over the past year plus, it seems like it was not too big of a hurdle. And I think you referenced that in your last answer and maybe during your presentation. But one is, can you just help us understand the dynamics of the clinical trial designs of therapeutics? And then also just -- this would be a device-based intervention versus therapeutic. And are there any benefits for using a device versus a drug?

Yes. I think we'll have more detail on what that path looks like and what clinical data we will be looking to obtain. I think that we're shooting for a higher bar to really become the dominant player in this space. And so I think as it relates to a therapeutic, so there are no approved therapies to treat ticagrelor and reverse the effects of ticagrelor and Brilinta today, with the exception of CytoSorb in the European Union. There's a company called PhaseBio that is developing a monoclonal antibody against the drug, but that is also -- just started Phase III clinical studies and is considered a biologic. I think fundamentally, the difference is that we don't add anything to the body. We're just an absorber that removes the drug from the body, which I think is a better concept, frankly. Also, CytoSorb is extremely simple to implement. It installs into a heart-lung machine during the surgery to remove the drug while the CABG or aortic reconstruction is going on, and it is completely invisible to the cardiac surgeon. This cardiac surgeon doesn't even know it's there, but all the while, it's removing the drug, reversing the anticoagulant effects of the drug. So that when they come out of surgery, they don't even look like they're on the drug. And then for other -- the direct thrombin inhibitors and even Andexxa by Portola, both of those reversal agents have black box warnings of being prothrombotic, right? For this reason, you would never use it during open heart surgery because you're dealing with the arterial system. And if you cause a clot, that's a stroke or that's a heart attack or that's an ischemic cut or some other complication. And so because of that black box warning, they actually play in a different field. They are more of a -- in the words of my Chief Medical Officer, an airbag that deploys after the catastrophic bleeding has occurred. While we're more like antilock brakes, where we're trying to prevent that catastrophic bleeding from happening in the first place. They're charging -- Andexxa for a single dose is $25,000 a dose. $5,000 a cartridge for us, that's very reasonable, particularly given the cost economics data that we've put forth. And so -- and from a cost perspective against any type of monoclonal antibody, we think that a solid-state cartridge like this with gross -- with high gross margins and plenty of room to move will be highly competitive, and we believe will dominate the market at the end of the day.

Excellent. Well, thank you for the download, Phil, and really appreciate you participating again in the Cowen Health Care Conference. We're looking forward to hearing more details on that strong record fourth quarter print that you guys reiterated today on your upcoming earnings call. But thank you so much for the time today. Appreciate it.

Really appreciate it, Josh. Thanks so much.

Absolutely. Thank you.

Take care.