When it comes to analyzing small biotech companies like Advanced Cell Technology (ACTC.OB), one has to take a very different approach. ACTC is company that I have followed for a long time, and they hold a special place within the biotech universe. This is a biotechnology company that specializes in the development of cellular therapies for the treatment of diseases and conditions that impact tens of millions of people worldwide. The company applies stem cell-based technologies (both adult and human embryonic) and other proprietary methods in the field of regenerative medicine to bring patient-specific therapies from the lab bench to the bedside.
Popular analytical methods like reviewing earnings estimates, or balance sheet ratios just do not provide the necessary information for any meaningful decision making about this company. ACTC is a highly risky, yet possibly highly lucrative, company that operates in a very unique space. Therefore ACTC will require a very unique style of analysis to make sense of it all. This being the case, let's combine some of this dry analysis work with some holiday inspiration to make it a bit more interesting. For this let us focus our attention on the Charles Dickens' 1843 novel A Christmas Carol and see how the ghost characters can help understand the true meaning of what makes up the company known as ACTC.
Ghost of Christmas Past
In the Dickens' novel the Ghost of Christmas Past was a character that highlighted Scrooge's past history and how the present came to be. Our equivalent ghost for ACTC will do something similar and show how past financial decisions by the company plays into its current state of affairs. When beginning to analyze this type of company, investors need to change their focus and start to look at cash burn rates as well as the number of outstanding shares. Our ghost does not have to go too far back into the past to unearth some items of concern. Actually the financial past for ACTC can pretty much be summed up in a quote from the CEO of ACTC in a past article I published. In this interview he stated:
What we never want to do is what this company has done in the past, that is to wait until you are out of money and then go out and try to raise more. It creates an overhang on you that you can't get out of. It put a gun to the head of the company every time we did one of the financing deals in the past.
Needless to say, entering toxic financing deals is never a recipe for success. Getting mixed up with predatory lending and unconventional financing can prove fatal. Luckily ACTC was able to escape this dangerous situation but not without paying a steep price. To get out of potential lawsuits and the negative overhang, ACTC has to further dilute their already depressed priced shares. As a result the number of outstanding shares for the company has greatly increased to 2,029,049,544 shares as of February 7, 2012. With a market cap of over $131 million, having over 2 billion outstanding shares will hold back the value of the stock.
The next thing that the ghost shows us relates to the company's cash position and their burn rate. These are very important measures as they show how long the company can fund their operations before having to find new sources of capital. The net cash used in operations for the 2012 third quarter was $3.8 million compared to net cash used in operations of $4.1 million in the same period in 2011. The company ended the 2012 third quarter with cash and cash equivalents of $8.3 million. A quick calculation shows that the company basically has only 2 quarters of cash left to fund the business. If one were to simply stop their analysis here then ACTC would look like a disaster waiting to happen.
The fact of the matter is that we can't just stop here. Turning our attention back to September 20, 2012 we see where ACTC announced it had entered into a $35 million common stock purchase agreement with Lincoln Park Capital Fund, LLC. This action will give ACTC the ability to fund operations for the foreseeable future from cash reserves and the $35 million funding commitment. It is also interesting to know that this funding did not require warrants with massive discounts to market pricing, nor any complicated structuring.
The Ghost of Christmas Past has shown us lots of things. The good news is that the cash burn issue seems to be under control for the time being. The bad news is the massive amount of outstanding shares is really causing a drag on the stock price. Let's turn our attention to the next ghost to see what information they might hold.
Ghost of Christmas Present
In the Dickens' novel the Ghost of Christmas Present was the entity that showed Scrooge the current happenings surrounding the present. For ACTC this ghost also has lots to show us. Since we have reviewed the cash burn and other financial dealings already, now is the time to take a look at how the company's products are progressing.
ACTC's current efforts revolve around the three ongoing trials for dry age-related macular degeneration (dry AMD) and Stargardt's Disease (SMD) using human embryonic stem cell. ACTC has treated 13 patients so far and has enjoyed some success. There have been no adverse safety issues relating to the transplanted cells. Also it has been noted that there has been no signs of rejection or tumor issues in any of the 13 patients.
Diving a bit deeper we see that the latest trials are encouraging. As researchers continue their quest, they are using high resolution imaging technology to measure the results. Without getting too technical, what they are reporting is that there is evidence indicating that the transplanted cells are getting to the right place in the sub-retinal space. Once there they are engrafting and are apparently resurfacing areas of the retina with a new layer. As a result ACTC is continuing to see an encouraging trend as several patients are noting subjective and objective improvements relating to visual acuity, color perceptions and contrast in vision. For example, the first dry AMD and SMD patient's visual acuity gains continue to persist.
Where the Ghost of Christmas Past highlighted some very negative attributes, the Ghost of Christmas Present brings more positive events into focus. As the studies continue to move forward, it is hoped more successful measures will be recorded.
Ghost of Christmas Future
One of the most interesting ghosts in Dickens' novel is the Ghost of Christmas Future. This entity usually takes on the forbidding appearance of the Grim Reaper in most interpretations of the book. Fear of an unknown future is the driver here. The question is what this particular ghost has to show us about ACTC?
When analyzing small biotech companies, one has to attempt to look into their future to make an educated guess as to the potential of their end products. At this point the analysis turns very subjective as analysts can only make educated guesses. For example, successfully tested products with only a very small potential market do not make much sense for an investor. This is not the case for ACTC. Once again the best analysis work would come from the company itself as they have the best up to date information. Turning back to my interview, we find a very interesting quote dealing with the ACTC's macular studies that was given by CEO Gary Rabin:
One thing you have to remember is this; let's just say, in a hypothetical future scenario, that our product is approved. Then let's say we get 1% penetration of the 50 million people in developed markets today that have macular degeneration. Finally let's say we charge $10,000 per therapy. When that comes together it equals $5 billion per year, and that is just 1%.
These numbers are not set in stone, but their value is not that far off from what could be expected if the trials are successful.
Of course the Ghost of Christmas Future also can bring visions of trouble as well. ACTC's share price has badly tumbled over the last six months. One could speculate on several different reasons for this, but the one future event that seems to overshadow them all is the upcoming reverse split of the shares. In general, reverse splits are usually viewed as very negative events. For ACTC the planned reverse split is being completed in conjunction with an up-listing to the Nasdaq. The minimum amount was a 1-20 split, but the ratio can and might be much higher than that. Needless to say, this kind of future unknown event does cast a dark shadow over the entire operation as a whole.
Our three ghosts above have provided some very useful information when looking at ACTC. Some of it is very positive while other aspects are quite concerning. Obviously there are many more aspects of the company that will need to be reviewed. Such items as competing companies /technologies, future potential lawsuits, and possible partnerships are all examples of occurrences could have a major impact on the company and its stock price.
ACTC is a very interesting investment which should be classified in the high-risk category. That being the case, it also has the ability to become quite a success story. Prior to purchasing or selling shares, investors need to take a step back and really analyze the company. Low priced biotech stocks tend to be rather volatile, and oftentimes this can cause investors to let their emotions come into play. Whether positive or negative, these emotions can cloud the investor's judgment and may produce bad decision. In the end though, only time will tell if ACTC can make their Christmas dreams come true, of if they will get a lump of coal in their stockings.
Disclosure: I am long ACTC.OB.