Earnings Call Transcript - CTSO Q2 2020

Operator, Operator

Good afternoon and welcome to the CytoSorbents' Second Quarter 2020 Financial and Operating Results Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will open the call for your questions. Please be advised that the call will be recorded at the company's request. At this time, I’d like to turn the call over to our moderator, Jeremy Feffer. Please go ahead, sir.

Jeremy Feffer, Investor Relations

Good afternoon. Welcome to CytoSorbents' second quarter 2020 financial and operating results conference call. Joining me today are Dr. Phillip Chan, Chief Executive Officer; Vincent Capponi, Chief Operating Officer; Kathleen Bloch, Chief Financial Officer; Dr. Efthymios Deliargyris, Chief Medical Officer; Dr. Christian Steiner, Senior Vice President of Sales and Marketing from Germany; and Christopher Cramer, Vice President of Business Development. Before I turn the call over to Dr. Chan, I'd like to remind listeners that management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore, we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. Any projections as to the company's future performance represented by management include estimates today as of August 4, 2020, and we assume no obligation to update these projections in the future as market conditions change. During today's call, we will have an overview presentation covering the operating and financial highlights for the second quarter by Dr. Chan and Ms. Bloch. Following their presentation, we will open the line to your questions during the live Q&A session with the rest of the management team. At this time, it's my pleasure to turn the call over to Dr. Phillip Chan. Phil.

Phillip Chan, CEO

Thank you very much, Jeremy, and good afternoon everyone. We had a very busy and productive second quarter. First, total revenue grew 58% to $9.8 million, and product sales grew 61% to $9.5 million over the second quarter of 2019. Trailing 12-month product sales reached a record $30 million. Blended product gross margins were 70% in the second quarter, lower than 76% a year ago, due to a higher percentage of distributor sales versus direct sales and the higher cost of ramped COVID-19 production. One of the hallmarks of the second quarter was that the U.S. FDA granted Emergency Use Authorization or EUA to CytoSorb for use in adult critically ill COVID-19 patients with imminent or confirmed respiratory failure, enabling commercial sales to U.S. hospitals and generating approximately $667,000 in U.S. revenues. We also achieved FDA breakthrough designation for CytoSorb to remove ticagrelor during on-pump urgent or emergent cardiothoracic surgery. Additionally, we received EU approval for CytoSorb to remove rivaroxaban during on-pump cardiothoracic surgery. In May, Dr. Efthymios Deliargyris, better known as Makis, started as Chief Medical Officer and has done a fantastic job in a short time at the company. We've also treated more than 1,200 COVID-19 patients in over 30 countries, including the United States. We received $1.1 million in non-dilutive funds from the New Jersey Technology Business Tax Certificate Transfer Program and were awarded a $2.9 million Phase III STTR contract to advance HemoDefend-BGA to clinical trials for universal plasma and whole blood treatment. Finally, we expanded distribution to 65 countries, adding nine Latin American countries to our distribution network. One of the most gratifying milestones was announced yesterday: CytoSorb is now celebrating the delivery of more than 100,000 treatments cumulatively to date, with tens of thousands of patients treated in a wide variety of applications, with many publications documenting the lives that CytoSorb has helped to save. I want to thank all of our supporters and the broader CytoSorb family for your commitment and contributions in helping CytoSorb become a therapy that makes a difference to people across the world. The joint statement that we made in the press release sums up my thoughts well. I’ve been blessed with outstanding colleagues at the company, especially my management team, with whom I have had the pleasure of working closely over the years to build this company. I thought it would be fitting to turn it over to each of them to say a few words upon this very significant occasion before we continue. To lead it off, I’d like to invite Dr. Christian Steiner, Senior Vice President of Sales and Marketing and Managing Director of CytoSorb Europe, whose passion for the therapy rivals my own to start. Christian.

Christian Steiner, Senior Vice President of Sales and Marketing

Thank you, Phil. You already shared some exciting updates. My name is Christian Steiner, Senior Vice President, Sales, and Marketing. I'm based in Berlin, Germany, and I have led the commercialization of CytoSorb therapy from the beginning. So, what does it mean to have treated more than 100,000 patients? For me, it means that we have treated tens of thousands of patients who faced life-threatening situations. While we don't have an exact number, we know that every one of these lives helped by our therapy is precious, and we are working hard every single day to increase this number. Secondly, more than 100,000 commercial treatments means that we have generated over $90 million for the company, which has supported the development of our interdisciplinary commercialization structure and built awareness of this type of therapy. When we started in 2012, nobody knew about the therapy. I was actually driving around in Germany to convince ICU doctors to give it a try. Today, we are selling in 65 countries, including those where CytoSorb therapy has become the standard of care in certain indications. Furthermore, CytoSorb therapy has been listed as a potential therapy in the COVID pandemic by several countries and the World Health Organization. I want to thank my teams here from CytoSorbents Europe, CytoSorbents Switzerland, and CytoSorbents Poland for their amazing performance, stamina, motivation, and enthusiasm during this journey and obviously also for our expanding patient base. The variety of indications that have emerged over the years is a testament to the therapy's potential, and I'm absolutely convinced that this is just the beginning of a new era that will change medicine. Thank you.

Phillip Chan, CEO

Thank you very much, Christian. Let me please turn it over to Vince, our Chief Operating Officer and President. Vince?

Vincent Capponi, Chief Operating Officer

Thank you. This has been a fantastic journey for all of us. It is a rare opportunity to be part of a growth story like CytoSorb, moving a product from concept in the lab to full commercial distribution. We are changing medicine by providing lifesaving therapy, as Christian mentioned, to combat deadly inflammation and the recent label expansion for anti-platelet and antithrombotic drug removal will open new opportunities in North America through breakthrough designation. With our recent financing, we are now able to expand our current capacity to support an $80 million business to one of $300 million to $400 million. While we aggressively pursue the next generation absorber, we look forward to CytoSorb excelling. It has been both an honor and a privilege to work with so many talented people to bring us to this point in our growth. I want to say thank you to our engineering, quality, R&D, and production teams for all your hard work. Your perseverance has brought us to this point, and I congratulate you on a job well done.

Phillip Chan, CEO

Great, thank you Vince. And Kathy, our Chief Financial Officer. Kathy Bloch?

Kathleen Bloch, Chief Financial Officer

Good afternoon everyone. When I joined CytoSorbents over seven years ago, the company was just beginning to commercialize CytoSorb in Germany. I can still remember the excitement when an invoice would come from across the pond. We would huddle around it, asking how many devices it was and if it was a new hospital or an existing customer with a repeat order. Today, the invoice register is sent electronically with dozens of invoices daily. We’ve come a long way. Recently, we've had the opportunity to bring CytoSorb to the United States to assist in treating severely ill COVID-19 patients, which has been very gratifying for us. Additionally, we have made significant strides in terms of financial resources to meet our goal of bringing our life-saving CytoSorb technology to the world. When I joined in 2013, we had approximately $1.3 million in cash. Today, following our recent equity financing, we have over $89 million in cash. I want to echo what Phil, Christian, and Vince mentioned about this capital because it is vital for our future success. This capital will enable us to generate the clinical data required for U.S. FDA approval, expand production capacity, and drive worldwide sales and growth, which will lead to operating profitability. We’ve come a long way thanks to my great colleagues and all the employees at CytoSorbents Corporation. I extend my sincere thanks to everyone for the hard work and dedication that has brought us to this amazing milestone of over 100,000 CytoSorb treatments worldwide. I'm privileged to work alongside each of you. This is just the beginning; we have much more work ahead to ensure our life-saving technology reaches and helps many more people across the globe. I know you all join me in looking forward to even greater successes yet to come. Thank you.

Phillip Chan, CEO

Thank you, Kathy. And Makis, Dr. Deliargyris, our Chief Medical Officer. Makis?

Efthymios Deliargyris, Chief Medical Officer

Thank you, Phil. Let me start off on a personal note. I’m the most recent addition to this management team, having only joined about three months ago, but I can tell you the developments and excitement in that time have been incredible. You've already heard some of the milestones that were achieved, including the CE Mark approval for anti-thrombotic removal, and ticagrelor and rivaroxaban specifically in the EU, along with the breakthrough designation from the FDA for ticagrelor removal. These are crucial accomplishments for the company. As a physician and interventional cardiologist who has treated patients firsthand, witnessing their suffering from major, often fatal bleeding complications, having CytoSorb as a clean solution will transform the standard of care in managing these patients, and I'm thrilled to be involved in these incredible programs. Recently, we also engaged with U.S. hospitals through the Emergency Use Authorization and have received heartwarming success stories from clinical teams throughout the U.S. who have managed lethal cytokine storms effectively with CytoSorb. Hearing patient stories of survival has been incredibly fulfilling. Lastly, we held our first milestone review of the pivotal REFRESH 2-AKI Trial this past month. After a thorough review of safety data, the DMC recommended that the trial resume, providing us another path toward U.S. approval. None of this success would have been possible without the dedication of our talented regulatory, medical, and clinical teams at CytoSorbents in both the United States and Europe. Moving forward, we are excited and these same teams are now focused on pursuing our top two priorities: First, to gain U.S. approval for CytoSorb; and second, to execute an ambitious clinical trial program to establish CytoSorb across multiple indications as a Standard of Care in critical care medicine and cardiac surgery to drive the next 100,000 treatments worldwide.

Phillip Chan, CEO

Thanks very much, Makis. And lastly, Chris, our Vice President of Business Development. Chris?

Chris Cramer, Vice President of Business Development

Thanks, Phil. 100,000 treatments is a big accomplishment, and I want to echo the points made earlier by my colleagues, especially those recognizing and thanking all of the patients, physicians, employees, and investors who worked tirelessly to reach this milestone, as well as highlight the role our strategic partners have played in our journey. Partners have and will continue to be crucial in advancing CytoSorb. Today we work with some of the largest and most respected partners in the world, including Fresenius Medical Care, Terumo Cardiovascular, and Biocon. Early on, when we were still getting started and fairly unknown, these partners helped validate and build awareness of our technology. Partners like Biocon in 2013, FMC from 2014, and Terumo in 2016 were some of the early believers in CytoSorb, and their efforts to establish the therapy were critical to our success. These partners have also elevated global brand awareness through their involvement in medical conferences, symposiums, and promotional efforts. Furthermore, their extensive physician relationships have led to crucial contributions to our growing body of evidence through the development of clinical publications that were essential for advancing our therapy. While our work isn’t finished yet and we are still in the early stages of a much larger opportunity, I want to take a moment to thank our partners, FMC, Terumo, and Biocon for their continued support. I look forward to them playing an important role in our future success.

Phillip Chan, CEO

Thanks very much, Chris. On behalf of the Board of Directors and the management team at CytoSorbents, thank you to everyone involved in our story. We look forward to many more successes ahead. Now, on the next slide, I’d like to discuss the significant financing we completed on July 24, 2020, where we raised $57.5 million in common stock, with net proceeds of approximately $54 million, enhancing our cash balance to approximately $89 million, which significantly strengthens our balance sheet. This financing drew considerable interest from institutions, with participation from long-term healthcare-focused institutional investors. As part of this financing and given our improved financial position, we agreed to not raise additional equity capital, which includes avoiding ATM financings or secondary public offerings over the next 90 days, as we currently have no plans to raise additional funds. We've often been asked why now? The funding serves multiple purposes: It increases our institutional ownership and provides growth capital to capitalize on near-term opportunities to enhance worldwide sales. Additionally, it supports our efforts in manufacturing expansion. While achieving capacity to support sales of $300 million to $400 million, we will also invest in automation and improvements expected to enhance product gross margins. It is also intended to fund the company towards expected GAAP profitability and fortify our financial stability during uncertain times, enabling us to pursue clinical studies aimed at making CytoSorb a Standard of Care while also securing additional resources for pipeline development. Most importantly, this funding allows us to expand our offerings and unlock a significant and potentially lucrative U.S. opportunity. Today, our U.S. opportunity is threefold: First, it involves assisting patients in the U.S. while raising product awareness within hospitals and medical communities nationwide. Second, it pertains to pursuing a pivotal trial path with our REFRESH 2-AKI trial currently resuming, and lastly, we focus primarily on the FDA breakthrough therapy designation for CytoSorb for the removal of ticagrelor, a major blood thinner used in acute coronary syndrome treatment during emergency or urgent cardiac surgery. Regarding COVID-19 and CytoSorb, we are currently treating over 1,200 critically ill COVID-19 patients in 30 countries worldwide. You can find links to numerous COVID-19 webinars in our earnings press release today that support various findings, including the reduction of cytokine storms and inflammatory mediators such as IL-6 and ferritin, which are often associated with the most severe and life-threatening illness. We have also seen improvements in respiratory function in acute respiratory distress syndrome cases, as well as stabilization of hemodynamics and reversal of shock. The U.S. FDA Emergency Use Authorization allowed us to commercially sell CytoSorb to hospitals in the U.S. for critically ill COVID-19 patients aged 18 years or older facing imminent or confirmed respiratory failure, generating U.S. sales of $667,000 this quarter, primarily from inbound interest. We are currently expanding U.S. commercialization efforts through distribution and internal resources to meet the ongoing surge as we prepare for a potential second COVID-19 wave expected this winter. As many of you are aware, although COVID-19 has slowed in Western Europe, it is surging in other regions where we continue to ship our therapy. We are preparing for what looks to be a challenging flu and COVID-mixed winter season. Our strategy includes targeting data publication and capturing data through our CTC COVID-19 registry, as well as our international CytoSorb registry. We are also working on several investigator-initiated studies registered in clinical trials.gov to collect additional data. In addition to the FDA Emergency Use Authorization for COVID-19, CytoSorb has been recognized in several countries. For instance, in China, blood purification is included in the guidelines for treating cytokine storms during COVID-19 prevention and treatment. CytoSorb is also part of expert consensus recommendations in Colombia's Journal of Nephrology, a medical innovation briefing published by NICE in Great Britain, courses on severe COVID-19 treatment in Germany, DCGI approvals for treating COVID-19 in India, and recent approvals from Israel's Medical Devices Division and mentions in Italy's Brescia Renal COVID-19 Task Force recommendations. On the next slide, as Makis mentioned, REFRESH 2 is now resuming. Recently, on July 28, we announced that the REFRESH 2 data monitoring committee reviewed data from the 153 patients included in the trial and recommended the study continue with only minor modifications pending COVID-19 restrictions. I’d now like to share what we believe is one of the quickest, least expensive, and highest visibility applications for potential U.S. approval today: the removal of blood thinners during cardiothoracic surgery. Earlier this year, CytoSorb received EU approval to remove two well-known blockbuster anti-thrombotics during cardiothoracic surgery: ticagrelor, a $1.6 billion worldwide sales anti-platelet agent frequently used in heart attack patients, and rivaroxaban, a blockbuster Factor Xa inhibitor commonly used in lifelong therapy for patients with atrial fibrillation, with more than $7 billion in 2019 sales. The challenge is that patients requiring emergency cardiothoracic surgery while on these blood thinners can develop serious, life-threatening perioperative bleeding. CytoSorb easily fits into a heart-lung machine, and as blood flows through the cartridge, it rapidly removes these drugs during surgery, achieving over 90% removal from whole blood in cardiopulmonary bypass simulations, thus reversing their anticoagulant effects. We believe CytoSorb can quickly become a cost-effective standard of care to prevent bleeding due to anti-thrombotics, thereby driving sales growth. This slide highlights the high risk of bleeding in CABG patients on ticagrelor. In the ticagrelor registration PLATO trial, 1584 patients underwent CABG surgery; those on ticagrelor faced significant risks of life-threatening bleeding compared to those on Plavix. The data shows that regardless of efforts to let the drug wash out, the bleeding risk remains extremely high. Fortunately, CytoSorb rapidly removes the drug, as demonstrated in a landmark study at St. Georg Hospital, where they observed reduced bleeding complications in emergency surgeries using CytoSorb. A separate analysis in the UK suggests a projected cost savings of about $5,000 per patient — including the cost of CytoSorb — translates into substantial benefits for hospitals. This positions us well for a potential expedited U.S. regulatory path following our FDA breakthrough designations. As mentioned earlier, the FDA granted us breakthrough designation to remove ticagrelor during cardiac surgery, emphasizing the unmet medical need recognized by the agency, facilitating our path toward potential U.S. approval. We are currently defining the regulatory paths for this therapy, weighing the merits of a 510(k) versus a de novo or PMA pathway. Competitors such as Portola have established FDA precedents for using surrogate markers like platelet aggregation for primary endpoints in securing FDA approval. Moreover, additional data from the TISORB trial and the safe and timely antithrombotic removal registry will further support these efforts. For anyone who hasn’t seen the key opinion leader event on CytoSorb anti-thrombotic removal held on July 13, I highly recommend viewing it for discussions from field leaders about our therapy's potential, not just in cardiac surgery but also beyond. The slide highlights that if we secure U.S. regulatory approval today, we calculate a total addressable market of roughly $250 million for urgent and emergent cardiac surgeries involving patients on ticagrelor, based on 50,000 surgeries at a $5,000 price point. We expect the ticagrelor market share to grow post-2024 with patent expirations and price erosion from generics facilitating adoption, and CytoSorb’s reversible mechanism provides a compelling marketing edge over non-reversible alternatives. Looking at the current opportunities for ticagrelor alone increases our total addressable market to approximately $500 million, and when including other NOACs like rivaroxaban and apixaban for cardiac surgery, it could reach as high as $1.5 billion. This, combined with substantial market opportunities in Europe and other regions, presents us a promising future.

Kathleen Bloch, Chief Financial Officer

Thank you, Phil, and my greetings again to everyone. For today's call, I’ll provide an update on CytoSorb's second quarter 2020 financial results, including product sales progress, an overview of our working capital, our recent equity raise, and our cash runway. Our product sales for the second quarter of 2020 were a record $9.5 million, representing our best quarterly sales to date, and an increase of approximately 62.7% over the $5.9 million from Q2 2019. This increase brings our annual product sales run rate to about $38 million. The growth in Q2 sales stemmed from increased direct sales of around $1.7 million from new and existing customers, coupled with an increase in distributor sales of roughly $2 million. Additionally, we made our first sale of CytoSorb in the U.S., totaling around $667,000 under the Emergency Use Authorization granted by the FDA. We estimate that approximately $2.4 million to $2.6 million of our product sales this quarter were due to the demand for CytoSorb to treat COVID-19 patients. Total revenue, including product and grant revenue, for Q2 2020 was approximately $9.8 million compared to $6.2 million in Q2 2019, representing a 57% increase. Our gross profit for the second quarter rose to $6.5 million, increasing 48% or $2.1 million from approximately $4.4 million in Q2 2019. Gross profit margins on product sales were approximately 70% for Q2 2020 versus 76% the prior year. If we exclude certain production costs associated with the ramp-up during the quarter, our gross profit margins for Q2 would be about 78%, which is still robust. For the first half of 2020, product sales were approximately $17.7 million, reflecting a 69.5% increase from $10.4 million for the same timeframe in 2019. While hard to quantify, we believe sales attributable to COVID-19 treatments amount to roughly $3.9 million to $4.3 million, offset somewhat by declines linked to elective procedural slowdowns. Looking at quarter-over-quarter sales, our Q2 2020 sales mark a new record, and should current order patterns continue, we expect COVID-19 to positively impact product revenues in the second half of 2020. However, conditions may shift based on pandemic containment or vaccine development. On a trailing twelve months basis, our annual product sales growth shows a strong trajectory, and we anticipate this trend continuing, bolstered by multiple factors, including sales and marketing expansion, increased public awareness of cytokine storm management, organic growth in existing markets, international expansion, and ongoing clinical publications. As of June 30, 2020, we had approximately $35.1 million in cash. In July, we closed the common stock sale with gross proceeds of approximately $57.5 million, leading to net proceeds of roughly $54 million, bringing cash balances to around $89 million. We expect this funding to sustain our operations well beyond the next 12 months, thus eliminating previously indicated going concern risk disclosures from our financial statements. Additionally, as of June 30, 2020, we had approximately 42.3 million common shares outstanding on a fully diluted basis, increasing by about 6 million shares post-equity offering to a total of around 48.3 million fully diluted shares. Phil, I'd like to turn the call back to you now.

Phillip Chan, CEO

Thank you, Kathleen. Traditionally, we haven't provided financial guidance until quarters are completed, but assuming current order patterns continue and notwithstanding uncertainties related to the COVID-19 pandemic, we expect Q3 2020 sales to be among our strongest quarters. This concludes our prepared remarks. Operator, please open the call for the Q&A session.

Operator, Operator

Thank you. [Operator Instructions] Our first question comes from Andrew D'Silva with B. Riley FBR. Please proceed with your question.

Andrew D'Silva, Analyst

Good afternoon. Congratulations on all the progress in the quarter. It's really impressive how much has changed in a year. Just a few questions for me. Can you help me understand what manufacturing looked like during the quarter and where you are currently in Q3? I believe you were running near full capacity for part of Q2, but given the sequential compression in margins, it appears there were some inefficiencies. Can you let me know if the transient nature of COVID-19 and the scale-up made it challenging to meet any real-time CytoSorb demand? If so, do you believe you’ve resolved those issues in Q3 as a second wave emerges?

Phillip Chan, CEO

What I want to say is that after receiving the Emergency Use Authorization in April and coping with the pandemic starting in March, we did an outstanding job ramping production to grow product sales over 60% year-over-year this quarter. To achieve this, we incurred much higher labor costs related to overtime and incentives, alongside increased inefficiencies from working at such high levels. We fully expect our gross margins to return to expected levels of roughly 80% or even higher in the future.

Andrew D'Silva, Analyst

Would you say now that in Q3 you're even more equipped to handle changes in hot spots in real time?

Phillip Chan, CEO

COVID-19 is unique in that it spreads globally but leaves certain places quickly. We anticipate a second wave occurring in the fall, potentially impacting states this winter. From a manufacturing perspective, we’ve been preparing for this and monitoring COVID sales worldwide. Our distributor sales were strong in regions that faced intense outbreaks, so we believe we'll be ready for the second wave.

Andrew D'Silva, Analyst

As it relates to the blood thinner opportunity, have you seen interest from AstraZeneca or any NOAC manufacturers since you expanded the label in Europe and secured breakthrough status domestically? Additionally, how prevalent are perfusionists and cardiologists in treating COVID-19 with CytoSorb? If they are utilizing it internationally, is there a crossover with blood thinner removal? Just curious about the bigger picture.

Phillip Chan, CEO

Yes, CytoSorb is utilized with a specific machine known as ECMO, which oxygenates the blood when mechanical ventilation fails. Those managing ECMO are typically cardiac surgeons, as operating it resembles the heart-lung machine in surgery. Many cardiac surgeons also operate on patients prescribed blood thinners, creating effective overlap in our marketing approach. Regarding your first question, unfortunately, I cannot comment on any specifics at this time.

Andrew D'Silva, Analyst

How many hospitals currently have over $1 million in CytoSorb sales?

Phillip Chan, CEO

We haven't disclosed that information. We only mentioned one hospital above that threshold, given its significant portion of our overall sales. Additional hospitals meeting that criterion will be disclosed in future communications.

Andrew D'Silva, Analyst

Best of luck going forward and congratulations again on the progress this year.

Phillip Chan, CEO

Thank you so much, Andy.

Operator, Operator

Thank you. Our next question comes from Josh Jennings with Cowen & Company. Please proceed with your question.

Josh Jennings, Analyst

Hi, good afternoon. Thank you, Phil and Kathy, and congratulations on a record product sales quarter. I wanted to ask about the multiple shots on goal for getting full approval in the U.S. from the FDA, including the REFRESH 2 trial, ticagrelor removal indication, and the COVID-19 indication for critically ill patients. Can you see a pathway for data accrual in critically ill COVID-19 patients that could potentially yield approval for that indication down the line?

Phillip Chan, CEO

As discussed previously, COVID-19 essentially behaves as another viral pneumonia, causing typical acute respiratory distress syndrome phenomena similar to other viral illnesses like seasonal flu. The complications associated with COVID-19 — whether acute respiratory distress syndrome or shock — are consistent with those we're managing in bacterial or viral pneumonia patients. We're focused on gathering data from COVID-19 patient treatments rather than purely fixating on data collection for COVID-19 itself. Our intent is to compile data representative of complications regarding viral pneumonia and present that to the FDA. We're actively working to collate that data for review.

Josh Jennings, Analyst

Thank you for that. I'm curious about the ticagrelor removal indication and the path forward for the U.S. How optimistic are you that a 510(k) path could potentially open based on discussions with the FDA, when might we receive clarity about the regulatory pathway for ticagrelor removal?

Phillip Chan, CEO

We are currently having discussions with the FDA, but it's too early to speculate on what path might arise. Our goal is to actively work towards that clarity and possibly define our regulatory approach soon. Makis, do you want to add anything?

Efthymios Deliargyris, Chief Medical Officer

Thank you, Phil. The indication concerning blood thinning removal during cardiac surgery has been given significant consideration, especially since we've gathered experience with the REFRESH 2 trial. We're in ongoing discussions with the FDA, utilizing the emerging safety data from REFRESH 2 to proceed. We expect to have clarity soon regarding the direction we will take.

Josh Jennings, Analyst

That’s encouraging. One last question — how is the CE-Mark label extension for antithrombotic removal playing out commercially? I know it’s early, but I wanted to touch on that.

Phillip Chan, CEO

Christian, would you like to address that?

Christian Steiner, Senior Vice President of Sales and Marketing

Absolutely, Phil. Josh, as you indicated, it's still early in the process since the recent label extension for ticagrelor removal occurred in mid-Q2. Given the pandemic’s pressures, there were significant challenges for hospitals to reset their operational systems. However, regarding the rivaroxaban removal CE-Mark, we have seen success, particularly in Germany where we service around 90% of heart centers, of which about 50% are utilizing rivaroxaban for removal under those guidelines with positive outcomes. We'll need to monitor its evolution moving forward.

Josh Jennings, Analyst

Thank you again.

Operator, Operator

Thank you. Our next question comes from Michael Okunewitch at Maxim Group. Please go ahead.

Michael Okunewitch, Analyst

Hey guys, this is Michael Okunewitch on the line. Thanks for taking the question. As we enter Q3, can you provide clarity on whether you expect a typical Q3 seasonal downturn, particularly due to COVID's impact?

Phillip Chan, CEO

From a seasonality perspective, while certain regions of the world like Western Europe have seen a lull in COVID-19, other areas, such as the Americas, Southeast Asia, and parts of Eastern Europe, are currently facing surges. The pandemic hasn't taken a break, and as Kathy noted, I expect COVID-19 will remain a significant growth catalyst in the latter half of the year. There is typical European seasonality slowdown in July and August, but should orders continue as expected, we anticipate Q3 will deliver record product sales.

Michael Okunewitch, Analyst

Thank you for that insight. One final question: what period does the $667,000 in U.S. COVID sales cover? Did sales begin immediately post-EUA on April 13, or was there some lag?

Phillip Chan, CEO

Before the EUA, we donated devices under the Extended Access Pathway for compassionate use. After obtaining the EUA, there was indeed a brief lag of a couple of weeks as we prepared for commercialization since we’re not a commercial organization in the U.S. Our team has worked collectively to meet the demand, and as we transition into Q3, we intend to pivot from passive sales to actively marketing our product, particularly to hospitals that already express enthusiasm for it.

Michael Okunewitch, Analyst

Thank you, and congratulations on a strong quarter.

Phillip Chan, CEO

Thanks very much, Michael.

Operator, Operator

Thank you. Our next question comes from Sean Lee with H.C. Wainwright. Please proceed with your question.

Sean Lee, Analyst

Good afternoon. Thanks for taking my questions. On the manufacturing side, you mentioned over $2 million in backorders at the end of Q1 due to manufacturing constraints. With the ramp-up in Q2, were you able to clear those backorders, and what is your current annualized production capacity for CytoSorb?

Phillip Chan, CEO

Some of the backlog stemmed from countries where COVID peaked quickly, and thus we couldn't fulfill all requests by the end. We remain at maximum capacity around $80 million, but we plan to expedite capital improvements as we transition to a larger facility.

Sean Lee, Analyst

Regarding the REFRESH 2-AKI study, you mentioned it received the green light to continue. Were any protocol changes recommended, and how do you plan to restart the study amid the ongoing pandemic?

Phillip Chan, CEO

I’ll have Makis provide details regarding that.

Efthymios Deliargyris, Chief Medical Officer

Thank you, Phil. COVID-19 impacts vary greatly across the U.S., with some clinical activities resuming while others remain on hold. Our approach will consider the unique circumstances of each site. The study was voluntarily paused to ensure data quality, and while the DMC made minor modifications for additional data collection, we do not foresee any significant logistical hurdles moving forward.

Sean Lee, Analyst

On HemoDefend-BGA, the company was awarded a $4 million contract by the Department of Defense for preclinical development. Will this contract take three years to develop HemoDefend, or can we expect clinical studies to begin sooner?

Vincent Capponi, Chief Operating Officer

The ABG project is different from the previous HemoDefend product aimed at COVID. We could potentially reach clinical trials within three years, but that timeframe isn't set in stone. We're in the early stages and this funding accelerates our progress in the field significantly.

Sean Lee, Analyst

Thanks for the insight.

Phillip Chan, CEO

Just to clarify, the recent funding firmly positions us to expedite this as quickly as possible, as there are no contractual obligations limiting us. We aim to get this product to market efficiently.

Sean Lee, Analyst

That makes perfect sense. Thank you very much.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to management for any additional or closing remarks.

Phillip Chan, CEO

Thank you again everyone for joining us today. We are very excited about what the future holds. Please feel free to reach out to Jeremy Feffer at [email protected] if you have further questions. We look forward to our next quarterly call. Thank you and have a good night.

Operator, Operator

Ladies and gentlemen, this concludes our conference for today. I’d like to thank everyone for their participation.