As most of my colleagues know, the majority of my personal holdings revolve around income investments. My priority is to try to get a diversified portfolio of income generating securities to generate a steady cash flow. That being the case, I focus on a variety of income investment vehicles like closed-end funds, master limited partnerships, and dividend paying blue chip stocks. As fulfilling as this is, income investments are not very exciting, and typically tend to be a bit on the boring side.
What every investor needs is a small dose of speculation. These high risk investments can spice up one's portfolio and possibly provide a windfall of profits if successful. If one wants to speculate, there really is no better place than the biotech sector. These small companies typically are focused on bringing radically new technologies to the forefront of the healthcare sector. To use a baseball analogy, these companies are swinging for the fences and hoping to bring investors along for a trip around the bases. The trick is to pick the best speculative candidate that has the most potential in bringing new products/technologies to market. Needless to say this is not an easy thing to do, but let's look at one speculative biotech company that just might be the next homerun hitter.
Advanced Cell Technology Inc. (OTCQB:ACTC)
Our first at bat in this biotech stadium is Advanced Cell Technology Inc. ACTC is a biotechnology company that specializes in the development of cellular therapies for the treatment of diseases and conditions. The company applies stem cell-based technologies (both adult and human embryonic) and other proprietary methods in the field of regenerative medicine.
As ACTC comes to the plate, it is hard to look past the checkered financial history. Past monetary dealings and company actions proved to be very challenging when it came to financing the company. This aspect of the company's financing was even addressed during my first July 31,2012, interview with the CEO of ACTC. In this interview the CEO stated that in the not too distant past ACTC operated under the practice of waiting until it was out of cash before trying to secure new funding. With the company's back continually against the wall, ACTC was forced into numerous toxic financing deals that left the company vulnerable on many fronts. In an effort to right the past wrongs, ACTC was forced to take drastic steps to clear all the toxic financing off the books. Stock dilution on a massive scale was used, and had a very negative effect on the stock price. As the toxic financing was cleared off the books, ACTC and its shareholders paid a heavy price. Currently the outstanding share count for ACTC stands at well over 2.2 billion shares as the stock trades on the bulletin boards. If one were to only look at ACTC's past financial history, it would be enough to scare away any potential investor.
The question is why would any investor want to take a chance with this stock to swing for the fences? The answer to this lies in ACTC's potential products/technologies. Like so many other small biotechs, the fate of ACTC will be based upon the results of its clinical trials. While the company has many different programs, it is going to be the Retinal Pigment Epithelial Cell (RPE) Program and its clinical trials that will set the pace. That being the case, this is where this article will focus.
The process started for the company with two Phase I trials that were designed to determine the safety and tolerability of RPE cells following sub-retinal transplantation in patients with Stargardt's Macular Dystrophy and dry age-related macular degeneration. As of April 1, 2013, ACTC, along with its medical partners, announced that it has treated 20 patients and there have been no safety issues reported. The science behind the trials is complex, but basically ACTC's treatments are trying to rescue the photoreceptors in the eye. One point to remember is that photoreceptors in the eye have a long period of atrophy and non-function before they actually die of the diseases. ACTC's two Phase I trials involved individuals with massive areas of atrophy in the field of vision. This means that very little photoreceptor rescue was possible at all because the photoreceptors were basically dead. What happened next though was unexpected for both ACTC and its partners. The cell studies showed engraftment, survival and function in the current patient population. Further detailed studies showed that the stem cells are sticking around for long periods of time.
As good as this news was for ACTC, it was still early in the trials so not much more was being expected. But then something changed. In late January 2013 ACTC announced that it had amended the patient treatment protocol for the remainder of the Phase I clinical trials for Stargardt's macular dystrophy and dry age-related macular degeneration. This would affect both trials being conducted in the U.S. and in Europe. Now patients with better vision, a visual acuity of 20/100, will be eligible for enrollment in the remainder of the trials. This is the chance that ACTC needed to swing for the fences. With the protocol change ACTC will be able to include patients with earlier stages of the disease. The plan will be to rescue the photoreceptors that are in a dormant - rather than dead - stage. This small change could have big implications in how potential investors could view the company and its potential.
If ACTC is successful and can halt or even reverse the effects of the disease, then the company would have hit a home run. Currently AMD afflicts more than 30 million people worldwide and is the leading cause of blindness in people over age 60 in the U.S. These numbers will continue to rise as the average life expectancy increases. Dry AMD represents a $25-30 billion market in the U.S. and Europe alone, and there are currently no approved therapies available for this condition. The best way to describe the company's potential actually comes from a past interview that I conducted with ACTC's CEO. In this interview he stated that:
"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%. We are talking about enormous markets here."
This potential has been lost on many investors, but not the potential partners that may exist. Once again let's turn to another February 7, 2013, interview I did with the company where another interesting bit of information was provided by the CEO.
"It is safe to say that if you talk to any biotech/pharma company that has an interest in ophthalmology, you will not find one of them that does not know every detail about our trials. In fact, we are at the point that we are almost pushing back, saying that we are not ready to give out the amount of due diligence material that they are asking for."
So who are some of these biotech/pharma companies that the CEO claims are in contact with ACTC? If the CEO's statement is true, then a quick scan of the ophthalmology markets shows six large companies must closely be watching the trials with great interest. These companies would include, but not be limited to - Pfizer Inc. (PFE), Allergan Inc. (AGN), Alcon Inc. (ACL), Novartis AG (NVS), Merck & co. Inc. (MRK) and Roche (OTCQX:RHHBY). If ACTC is successful in halting macular degeneration, none of the above companies could afford to let a market this big slip through their fingers and be controlled by a competitor. This unmet medical need could be worth tens of billions of dollars for those that control the technology. ACTC, being a small development company, knows that it would have little chance of bringing this product to market on its own. ACTC will have to enter into a joint venture with one or several larger more well established entities. Of course if proven successful in the trials there could also be a possibility of a wholesale buyout as a larger pharmaceutical could attempt to corner the market and capture the technology all for themselves.
Although ACTC's future is going to depend on the outcome of the trials, one still needs to take a close look at the company's current financial situation. Like most speculative biotechs, ACTC has a very limited revenue stream. The company's current reported revenue figures are derived from licensing fees that are being amortized over the period of the licensing timeframe. Below is an excerpt from the company's latest SEC 10-K report that shows current reporting revenue figures.
It's clearly evident that ACTC will have to depend on its cash reserves and any additional financing to make it through the trials. As shown above, research and development expenses increased from $9,953,224 in 2011 to $11,034,836 in 2012 for an increase of $1,081,612 or 11%. As the current clinical trials move forward there is little doubt that the research and development expenses will continue to climb. As ACTC adds personnel and expands its pre-clinical research, it will continue to eat into the company's cash reserves.
To survive the onslaught of mounting costs, ACTC will first turn to the cash it has on hand. The December 2012 10K SEC report recorded that number to be approximately $7,241,852. After that the company will turn to its Lincoln Park financing arrangement that has $32,058,898 available. In December 2012 ACTC received $2,941,102 from the issuance of 47,052,000 shares to Lincoln Park as part of the original $35,000,000 Purchase Agreement. This means that ACTC should be funded into early 2015 before the company runs out of cash.
Now is where the pieces of the puzzle come together to form an interesting set of circumstances. ACTC now has the funding to continue on independently until 2015. The company has been given the clearance to treat patients with better vision to prove if the technology really works. Finally, as reported by ACTC, most biotech/pharma companies that have an interest in ophthalmology are closely watching the trials and are in contract with the company. How will this all end? The answer to that question is anyone's guess, but until the endgame is revealed it will leave ACTC investors sitting on the edge of their seats.
In conclusion, any investment in speculative biotech companies is risky and ACTC is no exception. The company does have lots of potential, but the future is far from certain. As mentioned earlier the company does have other products/technology in its pipeline, but the RPE trials will be the catalyst that drives ACTC's future. Any failure in that arena will be detrimental to the company and its shareholders. On the other hand, with successful trials the company and its shareholders would enjoy a windfall of financial success. As ACTC sets up to swing for the fences, investors place their bets to see if the company strikes out or sends one into the bleachers.