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Edited Transcript of HSGX earnings conference call or presentation 9-Nov-17 1:30pm GMT

Q3 2017 Histogenics Corp Earnings Call

Waltham Mar 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Histogenics Corp earnings conference call or presentation Thursday, November 9, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jon Lieber

Histogenics Corporation - CFO

* Adam Gridley

Histogenics Corporation - President and CEO

* Stephen Kennedy

Histogenics Corporation - CTO

* Don Haut

Histogenics Corporation - Chief Business Officer

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Conference Call Participants

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* Chad Messer

Needham & Company - Analyst

* Josh Jennings

Cowen and Company - Analyst

* Sean Lee

H.C. Wainwright - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Histogenics third quarter 2017 financial and operating results conference call. (Operator Instructions) I would now like to turn the call over to Jon Lieber, CFO of Histogenics. Please go ahead.

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Jon Lieber, Histogenics Corporation - CFO [2]

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Thank you and good morning, everyone. Joining me today on the call is Adam Gridley, our President and CEO; Don Haut, our Chief Business Officer; and Stephen Kennedy, our Chief Operating Officer. A press release announcing Histogenics' financial and operating results for the third quarter of 2017 was issued this morning. For those of you who have not yet seen it, you will find it posted in the Investors section of our website at www.histogenics.com. On our call this morning, we will share with you a business update and our financial results, which will be followed by a question-and-answer session.

Before we begin our prepared remarks, I would like to remind you that various statements we make during this call about the company's future results of operations and financial position, business strategy and plans and objectives for our future operations are considered forward-looking statements within the meaning of the federal securities laws. Our forward-looking statements are based upon current expectations that involve risks, changes in circumstances, assumptions, and uncertainties. These risks are described more fully in our SEC filings and are available on the SEC's EDGAR system and on our website. We encourage all investors to read our SEC filings. All the information we provide on this conference call is provided only as of today, and we undertake no obligation to update any forward-looking statements we may make on this call on account of new information, future events, or otherwise. Finally, please be advised that today's call is being recorded and webcast.

I'll now turn the call over to Adam Gridley.

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Adam Gridley, Histogenics Corporation - President and CEO [3]

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Thank you, John, and thanks to our stakeholders for joining the call this morning. With enrolment in the NeoCart Phase 3 clinical trial complete, we are now preparing for the top line superiority data from this trial and the anticipated filing of the biologics license application, or BLA, in the third quarter of 2018 subject to positive Phase 3 results. This timeline leads to a potential U.S. launch as early as the middle of 2019 if approved.

We're focused on several strategic initiatives, and we will review those activities from the last quarter today: First, preparing the upcoming BLA for submission to FDA; second, raising awareness amongst financial and physician community for NeoCart in conjunction with our commercialization planning activities; and thirdly, expanding NeoCart to other regions such as Japan.

First on the BLA submission front. The NeoCart trial continues to progress towards the one-year primary endpoint data readout, an important milestone for Histogenics that is now less than one year away. Approximately 65% of the patients in the trial have come in for their one-year primary endpoint, and we continue to repeat positive anecdotal feedback from [our] investigators. Furthermore, we concluded last week our semi-annual Data Safety Monitoring Board, or DSMB, meeting, where the DSMB concluded that NeoCart continued to exhibit an excellent safety profile.

Upon the completion of enrolment, we shifted the large majority of our employees from a departmental operating structure into teams focused on preparing sections of the potential NeoCart BLA filing and subsequent commercial launch if approved. Now the BLA filing, while of course includes a safety and efficacy results from the NeoCart Phase 3 clinical trial, this trial is the largest, prospectively designed, randomized clinical trial in North America, evaluating the treatment of cartilage defects in the knee against microfracture. It is also the only trial with a one-year superiority endpoint and a special protocol assessment with FDA. Together, we believe these will lead to a rapid BLA filing. And when combined with a strong safety profile and the use of treatments will be a significant commercial advantage in the market.

To that end, our second strategy initiative is planning for the potential commercial launch of NeoCart. We're already investing in activities to drive awareness in the investor and clinician community that we believe will enable and drive the commercial success of NeoCart if approved. These activities included the following: We continue to work with members of our scientific advisory board and their institutions to add the robust portfolio of NeoCart clinical and non-clinical data. Our Cornell collaboration, for example, has generated important data to support a potential BLA filing and commercialization of NeoCart, and resulted in several high quality publications.

Most recently, we announced that data from our work with Cornell on the biomechanical competence of tissue engineered cartilage was published in the Journal of Biomechanics. Some of the important conclusions from that publication include, one, the ex-vivo production of extracellular matrix is critical to the biomechanical competence of the cartilage cell therapy and may enable earlier return to function after treatment; and two, the presence of extracellular matrix at the time of treatment improves biochemical competence of the therapy such as NeoCart when prepared for therapies comprised of only cells in the scaffold.

In addition, in the third quarter of 2017, we created a new clinical advisory board to work with the physician community to maintain engagement, and identify medical affairs and commercialization strategies leading up to a potential launch of NeoCart. We also enhanced our executive team of the promotion of Steve Kennedy to Chief Operating Officer, consistent with his focus on the manufacturing scale-up of NeoCart to supply the U.S. market upon potential approval, potential commercialization in Japan, and to further develop the platform opportunity underlying the NeoCart therapy.

Our objective remains clear, we intend to revolutionize the cartilage repair market by offering patients, physicians, and payers a novel restorative cell therapy to treat cartilage defects in the knee. We believe that NeoCart, if approved, may result in a faster recovery from pain and returned activity for the patients with a procedure that is relatively quick and easy for the physician, and had a potential lower overall cost of care for the payer. We believe that unlike other products or procedures NeoCart is uniquely able to address all of three of these important groups.

Now, as a reminder, our target market consists of those patients with smaller lesions, four centimeters or less, who are currently receiving or considering microfracture or debridement. There are approximately 150,000 to 200,000 microfracture procedures performed each year in the U.S., but prevalence is significantly greater with more than 1.2 million arthroscopic procedures related to cartilage defects. These defects, if left untreated, can progress to debilitating osteoarthritis and then potentially lead to an eventual total knee replacement. So these patients are seeking restorative cell therapies that help them lead a more active and healthy life. And if approved, we believe that these patients will seek these innovative therapies such as NeoCart that are supported by a robust set of clinical and non-clinical data. In fact, we believe that NeoCart is one of the most rigorously studied restorative cell therapies in cartilage repair.

Our third strategic initiative is to expand NeoCart globally, and our primary objective over coming months is to complete the development and commercialization agreement for NeoCart covering Japan or the broader Asia market. We believe that a strong commercialization partner can provide both the development expertise and commercial capabilities to maximize the opportunities for NeoCart in Asia and may potentially provide non-dilutive funding to Histogenics.

The markets in Asia are large, and we believe are in need of a better alternative that provides patients with rapid pain relief and may significantly delay or prevent the progression to osteoarthritis associated with cartilage defects. For example, we believe the market in Japan alone is approximately a third the size of United States and also has robust reimbursement in place. In addition, there is a greater receptivity to personalized regenerative and restorative therapy, such as NeoCart, both from a patient perspective and a regulatory perspective.

And our recent rapid development pathway clarity with PMDA, the Japanese regulatory authority, has generated significant press in Japan and interest from potential partners. Depending on the speed of a potential partner, we could see commercialization in Japan one to two years behind the U.S. launch if approved. And assuming we're able to complete a collaboration in Japan or Asia, we intend to then focus on other territories such as Europe, and we look toward to updating you on our progress on these efforts in the future. As you know, predicting the timing of the collaboration is incredibly difficult, but we have continued to make progress in this effort and are in discussions with a number of leading paying companies and large pharmaceutical organizations in Japan and the broader Asia region.

At this point, I'll turn the call over to Jon Lieber to discuss our financials.

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Jon Lieber, Histogenics Corporation - CFO [4]

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Thanks, Adam. For the quarter ended September 30, 2017, Histogenics reported a loss from operations of $5.7 million compared to $6.6 million for the quarter ended September 30, 2016. The decrease in overall operating expenses was attributable to a reduction in research and development expenses that was offset by a smaller increase in general and administrative expenses. We continue to focus our efforts on advancing the NeoCart development program while minimizing our burn rate. To that end, we expect lower total operating expenses over the next three quarters as we wrap up our clinical activities related to the NeoCart Phase 3 clinical trial and before we begin to prepare for the commercialization of NeoCart if approved.

Moving on to some specifics for the quarter. The decline in research and development expenses in the third quarter of 2017 as compared to the third quarter of 2016 was due to reductions in collaboration, consulting and temporary labor costs, and a decrease in expenses related to the NeoCart Phase 3 clinical trial.

General and administrative expenses increased to $2.2 million in the third quarter of 2017 as compared to $1.8 million in the third quarter of 2016 due to an increase in salaries, consulting, and facility repairs and maintenance expenses. These increases were largely driven by activities to support a potential BLA submission and commercialization of NeoCart if approved.

Net loss attributable to common stockholders was $5.1 million in the third quarter of 2017 or $0.23 per share compared to $9.2 million or $0.70 per share in the third quarter of 2016. The decrease in net loss attributable to common stockholders was primarily due to the lower operating expenses just discussed, $3.1 million in expenses related to the private placement we completed in the third quarter of 2016, and an increase in weighted average shares outstanding also resulting from the 2016 private placement.

As a reference point, we currently have approximately 24.1 million primary shares outstanding and 42.5 million fully diluted shares outstanding. As a reminder, the 42.5 million fully diluted shares include 13.4 million warrants issued in connection with the 2016 private placement that do not have a cashless exercise provision. So should the holders exercise those warrants prior to their expiration, we would receive approximately 30 million in proceeds.

At September 30, 2017, Histogenics had cash, cash equivalents, and marketable securities of $12.6 million compared to $31.9 million at December 31, 2016. Based on current operating plans and the expected timing of product development programs, we believe our current cash position will fund our operations into the middle of 2018.

I will now turn the call back to Adam for concluding remarks before we go to Q&A

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Adam Gridley, Histogenics Corporation - President and CEO [5]

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Thanks, John. We continue to believe that patients, physicians, and payers are looking for better alternatives for the current treatment options. Based on the data generated to-date and the anecdotal feedback we received from our investigators and collaborators, we believe NeoCart rebuilds the patient's knee cartilage and as a result provides rapid onset pain relief and restores function. By treating the problem at its source, NeoCart may reduce the use of opioids and as unnecessary and costly additional surgeries. Clinicians believe and the literature demonstrates that if left untreated, these defects often lead to osteoarthritis and potentially a total knee replacement.

With enrolments in the NeoCart Phase 3 complete, we're now focused on the top line data readout in the middle of 2018 and the preparation of our BLA application for NeoCart in the third quarter of 2018. We have a strong team and advisory board in place, which we believe is due to the strength of NeoCart and Histogenics underlying technology platform, and we're planning for a commercial launch of NeoCart in the second half of 2019 if approved.

Thank you for joining today's call. We will now open up the line for any questions. Operator, please open up the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Chad Messer with Needham & Company.

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Chad Messer, Needham & Company - Analyst [2]

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I know you guys are working hard to try to get something done over in Japan or Asia, and you kind of talked broadly about that market being a third the size of U.S. Can you walk us through in a little bit more detail what you've learned about it? I mean did the Japanese, for example, get microfracture at about the same rate? And then what do you know about reimbursement and pricing in Japan as you might expect compared to the U.S.?

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Adam Gridley, Histogenics Corporation - President and CEO [3]

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Thanks for the question, Chad, and happy to jump in. We are learning quite a bit as we're spending a regular amount of time in Japan talking with a number of partners and then, of course, doing a considerable amount of market research. So, first, I think what we would reflect upon is that the market in Japan is strikingly similar to the United States where there is a large, what I would call, satisfaction gap between the available therapies whether it be micro-fracture or other procedures and what physicians are looking for. So there's a host of themes that exist here that are also very prevalent in Japan.

I think there is also a large belief that if you don't treat these cartilage defects that is one of the leading causes of osteoarthritis and as we know OA is a big issue Japan both due to the demographic and then due some of the lack of pain treatments that are available. So I think there's a large unmet need there. And the belief that there is a need for microfracture, I think, is an overwhelming response that we hear from surgeons. It's an okay procedure, it's quick, but it doesn't provide the rapid pain relief, and it doesn't provide the true regenerative outcome that we think NeoCart is going to. And that has led to, I think, some robust reimbursement that is probably similar to what we've seen here in the United States.

So there is a product that has some, I think, some challenges both from a label and from a usage perspective, but it's still reimbursed at north of about JPY2.1 million, which is about $20,000. So I think what you're seeing is the number of parallels between the markets. And certainly as we talk to our surgeons some of whom have trained actually here in the United States they're all looking for better therapies.

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Operator [4]

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Our next question comes from the line of Josh Jennings with Cowen.

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Josh Jennings, Cowen and Company - Analyst [5]

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I was hoping to just start off asking about the recent biomechanical results that were published [which around] the collaboration with Cornell. You're building a portfolio of data that we haven't seen historically; I don't believe from your competitors either. I'm just wondering how this data is resonating in terms of demonstrating unique mechanism of action for NeoCart with clinicians, with some of the principal investigators, and I would like to start there, that would be great, if you have any color on that.

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Adam Gridley, Histogenics Corporation - President and CEO [6]

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Thanks, Josh, for the question, and I think it's really a good one. It's one that we're actually getting quite a bit of interest from both our investigators, from the regulators, and potential partners as well. And part of this comes from, I think, the really robust clinical response that investigators are getting, first and foremost, where they often have the reaction that the patient seemed to be doing better earlier. Now, of course, the data are blinded. This is all anecdotal evidence. But they really get that sort of wow effect when the patient comes back in at three and six months. And the first response is that this is great outcome, and then they say, well why, why are we getting those types of responses? And are we going to see that pretty consistently? And that's where we have been doing a lot of work to generate this biomechanical data to really explain why we're seeing such early return to function, potentially rapid pain relief, and that goes to, I think, the unique nature of the ex-vivo manufacturing process. But now we're able to demonstrate from a clear mechanism of action perspective why this cartilage tissue creates these great clinical outcomes.

So, Steve, if you want a comment a little bit more on some of the findings and what you're hearing from our partners, and as we're working with Cornell, what are some of the observations that they're providing as well.

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Stephen Kennedy, Histogenics Corporation - CTO [7]

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Yes, thanks, Adam. I think the -- well, the number one thing this most recent paper that really shows is what happens when you put cells on a scaffold and put it under stress, what happens when you wait until that extracellular matrix has been produced by the cells and put the construct under stress. And it definitely shows the difference. It shows how early on the scaffold is predominantly defining the biomechanics as opposed to once you go through a tissue generation process, then the actual extracellular matrix is defining the biomechanical properties. And that really does demonstrate the difference between -- it demonstrates the benefit of our tissue engineering process, and I think that kind of reiterates what Adam said.

The one angle that I'm most concerned about and is really important to me as we look forward is how do we use these data to then work with FDA on our target product profile, on our -- and how does it impact our BLA, how do we utilize this information to really support our overall process validation and process improvement studies. I think in terms of actually how it's resonating with clinicians, I think that it's -- in the clinic, again, it's able to support the arguments that we've been able to make with respect to the mechanism of action with the product.

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Adam Gridley, Histogenics Corporation - President and CEO [8]

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And further to that, this was a critical component, Josh, to our discussions with PMDA where there are a lot of cell therapies that are being introduced or at least trying to be introduced into the clinic. And some of these are just cells, some of them are cell and biomaterial construct, but we're able to show that we're making tissue. And as the PMDA reviewed that package, that biomechanical data was surprisingly more important than we had anticipated.

So, one, to have great clinical data. It's another to show that you've got a very strong mechanism of action and you're not just putting cells or materials in. You're putting a functional piece of tissue. So we were actually surprised at how well that was met with by the agency who is seeing a lot of other data out there that does not include this biomechanical data.

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Josh Jennings, Cowen and Company - Analyst [9]

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That's helpful. And I just wanted to follow up on, I mean, how differentiated is this data? Our impression is that it's highly proprietary. But in terms of some of those competitive products that are either in the U.S. or working in the U.S. but also out there internationally, is the biomechanical data or the mechanism of action evidence robust? Or are you guys way ahead in leading the pack?

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Adam Gridley, Histogenics Corporation - President and CEO [10]

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I think we're way ahead in leading the pack candidly in a couple of different areas, but one is that biomechanical data. And when we did this, it's part of an FDA request many, many years ago. And other companies have also been asked the questions, which is if you put cells in and you're trying to make claims that you're eventually making tissue, the question often is when, how, what's the quality of the tissue, what's the nature of the clinical response, and many of these cells or even cell scaffold constructs you don't know because you're not making tissue until it's been in the body for anywhere from 6 to 12 months.

In cartilage, because it's sort of immunoprivileged, the vascular is notoriously hard to generate in the body. So when we generate this outside of the body with all the biomarkers and now this biomechanical data, the regulators are starting to get a sense that we're seeing almost fully functioning tissue prior to implantation, whereas most of these other products, it takes 12 months or longer to be able to demonstrate that.

The manufacturing process is highly proprietary. And, of course, then, this links into what we think is the only one-year primary endpoint in the industry because most products can't show a difference against microfracture until two years. So I think this sort of holistically comes together in a pretty robust story, and I think this gives us sort of the long tail as we come into the market with some of that best data but also some of the best evidence to show why we get the best clinical data.

Steve, anything you'd add?

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Stephen Kennedy, Histogenics Corporation - CTO [11]

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Yes, the only thing I'd want to add to that is I know that Dr. Bonassar at Cornell University, who has done this work -- I mean first of all, they're the -- in my mind, they're the leading research laboratory that's doing this type of work. And from his literature search, they've been able to -- they know that we're the only company that has -- or the only -- this is the only study where the compressive this year and then the surface characteristics of these cartilage constructs have been evaluated in this way. So I think that does support Adam's point that we were -- we're quite a bit ahead of anyone else in terms of doing this sort of work, and I think it gives us a unique advantage and really differentiates the product.

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Adam Gridley, Histogenics Corporation - President and CEO [12]

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Thanks, Steve. And the final point that I would mention is getting right back to the physician is when we present this data, they very much get it. They have been presented with a lot of products, theories, cell flurries that we're all going to create these great outcomes, and in some cases, it's really obvious if you don't have the clinical response. But then the concern they have is why, what's the mechanism of action? They are scientists at heart. And when they see this data, they get pretty excited because then they also feel it in their hands when they take NeoCart implant [then to] patients, it's easy to use, it's actually very competent, and it's easy to cut. And that leads to what we think is going to be a huge competitive advantage, which is a 20-, 30-minute procedure and no special handling. So they feel the piece of tissue, they understand why it has the confidence, and then that correlates with the clinical data.

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Josh Jennings, Cowen and Company - Analyst [13]

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And I just want to -- I know we've talked about this topic before, but I just wanted to hear any updated thoughts where you're moving forward, get the data, submit the BLA, and then plans for commercialization. I'm sure they're still formalizing, but any updated thoughts in terms of sales force build-out as you get into that mid 2019 era with potential approval, assuming approval, obviously? Any help there would be great.

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Adam Gridley, Histogenics Corporation - President and CEO [14]

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Sure. I will start with quick response and then hand it over to Don Haut, our Chief Business Officer who joined back in June. He's been doing a lot of work with Jon and Steve on how we think about commercialization. Most of our thoughts really come from the learnings in the clinical trial. This is not going to be your typical orthopedic call point. It's not a surgical cell. This is really about bringing satisfied patients into the practice with an easy to conduct procedure.

And so, what we found in the clinical trial and where we were successful is that we had good medical science support, we had excellent clinical data, of course, based on the Phase 2, and then it's an easy to perform procedure. And if we are able to then drive patients into the offices, we think that many of those microfracture surgeons who aren't doing the other procedures, new on to better therapy, will start to opt in and treat those patients who are currently unsatisfied.

Don, do you want to comment further about our thoughts on how we start to build out that infrastructure?

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Don Haut, Histogenics Corporation - Chief Business Officer [15]

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Sure. Thanks, Adam. I think because of what we talk about really over the past five minutes the advantages of the products, we think -- and especially over microfracture, we think that this is going to be a highly technical sale, very focused on spreading the good words about -- and showing people the data so they will be highly MSL driven. But we don't believe we'll need very significant sales force. I mean we don't think we are going to need to go out and hire 50, 60 kind of the traditional spec pharma type sales force. We can start a lot smaller.

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Operator [16]

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(Operator Instructions) Our next question comes from the line of Sean Lee with H.C. Wainwright.

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Sean Lee, H.C. Wainwright - Analyst [17]

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With the Phase 3 study now in full swing, are there any manufacturing or C&C validation or optimization processes that you have to conduct between now and when you plan to file the BLA?

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Adam Gridley, Histogenics Corporation - President and CEO [18]

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Hi, Sean. Thanks for the question. And absolutely, we're doing a lot of work across all of the elements of the organization from the clinical data follow-up to the C&C preparatory activities. So 90% plus of our organization after completing the last NeoCart production lot and finishing the trials have turned to preparation for the BLA, and there are a variety of activities that are taking place to prepare for the C&C section. Steve, do you want comment further on just the types of activities both from a facility, from a process, and cGMP manufacturing prospective?

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Stephen Kennedy, Histogenics Corporation - CTO [19]

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Yes, sure. Well, Sean, you put your finger right on it. I mean we're deeply engaged in validating the processes for biomaterials at our Lexington facility as well as the NeoCart process at our 830 Winter Street facility. So we're deeply involved in that. The whole organization is completely geared and focused on that right now, and we're right on track in anticipating that the schedule for that work is completely consistent with our BLA filing data at this point.

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Sean Lee, H.C. Wainwright - Analyst [20]

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And looking a little bit further ahead, what are some of management's thoughts on potential indication expansions or follow-on pipeline profits?

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Adam Gridley, Histogenics Corporation - President and CEO [21]

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Sure. Sean, I think you also highlighted an important point where NeoCart in the knee is really just the first of what is probably several indications. This is a platform opportunity. So if you can fix cartilage in the knee, which is clearly the biggest opportunity, because we control all the biomaterials and namely the scaffold, which we can then make to different sizes, depth, and other opportunities for expansion, we would likely take this into a number of indications fairly quickly.

The first would probably be ankle. That's probably the next biggest unmet need, and that's a pretty sizeable market. And we think the advantage of this platform is that because you may have some of the same manufacturing processes, maybe just a slightly different size scaffold, you're not starting for de novo development program. This is really a Phase 3 second indication type of trial that we would think about in the future.

So, I say, ankle is probably the next biggest priority. We then look at hip and shoulder. Part of that goes to our allogeneic strategy, where eventually we'd like to create sort of a Master Cell Bank and be able to then have off-the-shelf implants as well. And that's the beauty of the ex-vivo manufacturing platform is that not only can you control the biomaterials, you can then also control the cell source, but it's still the same underlying safety and efficacy package that allows us to rapidly take this not only into new indications but then also in the new markets.

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Operator [22]

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Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Adam Gridley for concluding remarks.

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Adam Gridley, Histogenics Corporation - President and CEO [23]

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Thank you, operator, and thanks to our stakeholders for participating on the call today. We appreciate your support and look forward to reporting on our progress for the upcoming BLA filing subject to successful Phase 3 results, and that's all by a potential commercial launch in the U.S. and other territories if approved. Have a good day, everyone.

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Operator [24]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.