The Inflection Point
Written by Fas Kuiters
Long term investors into this exciting technology, of which most at least got third degree financial burns in their wallets and some might even have incurred heavier losses, certainly will remember the speech Marc Hedrick gave in the November 2009 Conference Call.
The title of this little speech was- We can "smell the Inflection Point" - the roadmap he saw at the time to a break-even situation, which would occur some UNDEFINED time in the future, which was explained in some more detail in the image which Mark Saad at the time (2009) had shown (see image below). This predicted Inflection Point -as we know- never came and Marc must have smelled something different. The mystery is still, what did he smell? Anyway-keys to this failure was mainly, that the marketing pull from surgeons and consumers, which never came as predicted, since not having any specific indications approved or supported by adequate clinical data and the fact that device 510K was never realized in the US.
Ren Benjamin - Rodman & Renshaw
This is a follow up to that. The inflection point that I think both Marks have mentioned, how do you characterize that? I mean I understand it’s easy to see as far as revenues going up. But what do you need to see prior to that being registered, let’s say, on a P&L statement?
Marc H. Hedrick,
We can smell the inflection point. With my clinical background you have to make a diagnosis in the field what’s holding things back from the perspective of increasing adoption, people buying the technology, putting it in their practice. And driving through-put by the number of consumable sales. But I think the four things that we tried to outline in the (shareholder-)letter on which I will focus now, will contribute in reaching that inflection point. And with this caveat, we can’t predict when it’s going to happen. But we feel confident it will. And we just need to drive as hard as we can to achieve that.
So, number one, is making our customer, physician, practices successful. Doctors aren’t used to selling cell therapy and stem cell related technology. Therefore require marketing and sales support. We’ve done some internal restructuring. We are working incredibly hard, devoting a lot of resources to putting tools into doctor’s practices to make it easy for them and their business. Folks within the practice to sell the technology.
We’ve added a new Vice President, David Oxley, to run our sales marketing group.
Additionally, there’s a clear interest on the consumer side for the technology. So when we have any physician that’s particularly astute in marketing goes out and gives a presentation or gets some media attention, the number of calls that flood the practice almost closes down their phone lines. And so, you really see patients saying, yes I want stem cell treatment X or stem cell treatment Y. We’re starting to see the beginning in Cytori as we develop this of a direct marketing (push-) to consumer approach (pull-), that will grow in scale with the business. And that includes increased media exposure, trying to leverage a focus on local markets and minimize costs initially, but growing that. So, there’s this whole marketing and sales support function that’s been increasing, growing and morphing over time.
The second part of that, is improving the features and benefits of the technology. Perhaps you remember the press release of a few weeks ago, where we put out a major new release of the (Celution) software that’s really geared towards allowing the doctor to have more tissue volume available and cell volume to treat individual patients.
On a practical level that means in a lot for patients, whereas before they could only do one cup size breast augmentation, now they can do two cup sizes, for example. So not only broadening the utility of the technology, but also decreasing the time so it works better in the patient/doctor workflow. And the doctor can basically boost his pay per hour during the day using the technology. It therefore improves the practice economics.
And then there is the ongoing basis to pure graft technology that’s coming out, Celution One, the Olympus version that’s coming. And perhaps things in the future, are all geared towards enhancing the product of features and benefits and its use in the practice.
And two other things to highlight, one I highlighted previously, which is better tailoring the channel model by letting GE do what GE does best, let Cytori do what Cytori does best. And the same with MBA and going direct in places, where maybe we haven’t before and capturing that margin. They’re all important in tailoring that channel model to make it more successful.
And then finally, well we haven’t really touched on it, is our US regulatory strategy. We’re happy that we’re going to be a device. We hope we’re going to be a 510(k). And as soon as we get regulatory approval in the US, then we look forward to launching the Celution family of products in the US where we think demands are already there. So all those things together, I think, drives towards an inflection point. And having the number of people that we have in the field, interacting with the customer, having customers coming to San Diego and taking a tour and seeing the technology, hearing the presentation. All this lead us to the strong belief that inflection point is coming.
In March 2016, the Inflection Point was again presented by Hedrick after John Harris gave an overview of marketing activities in Europe and Japan. Key drivers should be the Managed Access Program in Europe and adoption in Japan. To me its all more concrete than what we heard in 2009. But In May we heard again of the Rights Offering, which Hedrick said in the prepared statement, which was unlikely going to happen. You have to be the judge- i.e. have to judge for yourself....
So to sum up then, in terms of our 2016 financial plan here is what we see. A continued emphasis on burn reduction in 2016
and despite the substantial efforts our team has made since I took over as CEO, which includes reducing the headcount by about 40% and reducing the operating cash burn by nearly 40%.
The future gains will not come as easily as they did over the last couple of years. As next we focus on further cost containment activities and some other initiatives that we think are going to drive operating efficiencies. Things like structural reductions such as overhead reduction and ongoing initiative to lower our current products cost of goods and increase the margins related to sales of those products and continued pressure on discretionary expenses.
We also see revenue opportunity as John mentioned. First of all, revenue growth in Japan and that’s primarily due to clarity that we see on the regenerative medicine law front as well as implementation of some new strategies that John mentioned that we think have legs. The second thing is an important new source of revenue, the Managed Access Program which provides us immediate on ramp and to a sizeable market in scleroderma that we think is going to materialize this year and then grow until we get the full approval in the US which is where growth should rally. And then finally, we are anticipating continued government contract revenue and related offsets.
Now as Tiago mentioned we can forecast a further reduction in burn in 2016, however most planned expense reductions will largely be implemented in the 2016 timeframe and therefore we see continued burn reductions in ‘17 and ‘18 primarily related to anticipated revenue growth with the MAP in Europe and in Japan. Operationally, with the ground work laid in 2015 and due to our increasingly positive outlook in 2016 and beyond, we are increasingly becoming confident that we are on a path to overall
cash flow breakeven territory by 2018. So as we started to understand that we really had an opportunity to leverage this operational progress, we asked how do we more beneficially engineer our financial and capital structure. And I think we did this in several ways.
First, it sounds like a broken record, but continuing to preserve existing cash and put pressure on burn is key for us and related to that, over the past 18 months, we’ve retired or restructured essentially all the key outstanding liabilities the Company had, including our Olympus liability. In December, we scrubbed our capital structure such that we now only have about 3.5 million of very straightforward warrants outstanding. We also accomplished a deferral of loan principal repayment by virtue of a good lender relationship in our interim OA data which triggered a pre-negotiated interest only extension and reduction and about $3 million in amortization payments. And we preserved an active $33 million ATM facility to be used if and when appropriate.
So one way to look at this albeit sort of artificial, but you can look at the world and say, if Cytori adds up the cash it has on-hand at year-end and adds to that all the elements I mentioned such as declining burn trajectory, the anticipated revenue growth, throw in the flexibility provided by the ATM and then add in a reasonable upside scenario from our active licensing program, on a pro forma basis today, we have enough current cash, access to capital and visibility to non-dilutive opportunities to get us to overall corporate breakeven in 2018. And to be clear, that's prior to formal US scleroderma launch and that's without any additional new financing transactions.