Investing in speculative biotech stocks is not an easy business. Unlike other types of entities, these speculative biotech companies are a secretive bunch. With numerous nondisclosure statements, trade/patent secrets, and patient sensitive records; trying to get useful investing information is tough. That being the case, one almost has to become a detective of sorts to try to derive some meaningful bits of investing data. Some of the best information comes from company conference calls that are presented around quarterly results. In these calls the company provides much needed clues as to the current state of affairs. String a couple of these calls together with interviews and corporate presentations, and a clearer picture begins to form.
Once again that is where I find myself with Advanced Cell Technology (ACTC.OB) and their latest conference call that was just presented on 5/9/2013. Before continuing, it should be stressed that ACTC is a speculative and risky investment. There is a very real chance that shareholders could lose a major portion of any capital invested in the company. On the other hand, it should also be stated that the potential return is equally impressive if the company is successful in its endeavors. Putting on my detective hat I once again dive into the mix and see if I can make sense of the current state of affairs, as well as any potential future trigger events for this company.
Observation 1 - Timing & Delays
The initial tests for ACTC started with two Phase I trials that were designed to determine the safety and tolerability of the company's RPE cells following sub-retinal transplantation in patients with Stargardt's Macular Dystrophy (SMD) and dry age-related macular degeneration (AMD). As noted in my last article, the company's focus shifted in January 2013. At that point ACTC announced that it had amended the patient treatment protocol for the remainder of the Phase I clinical trials. Now patients with better vision, a visual acuity of 20/100, will be eligible for enrollment in the remainder of the trials. ACTC was moving away from just the safety and tolerability aspect of the trials. Now the focus has shifted to the actual rescue of the photoreceptors that are in a dormant in these patients with better vision.
The initial announcement was made in January 2013, but very little information was released as to how this change was unfolding. Then in April 2013 the company announced the treatment of the first patient in cohort 2a, in its U.S. clinical trial for Stargardt's Macular Dystrophy (SMD). Now from January to April is a long time, and biotech investors being a skittish bunch do not do well when left uninformed. So shareholders like me were left to wonder how events were occurring. Turning to the latest conference call we see more light being shed on the subject. In the introduction of the call Gary Rabin, chairman and CEO, stated the following:
"To date, we have treated one Stargardt's patient in this new cohort, but we have scheduled one more Stargardt's and two new AMD patients just in the next couple of weeks. At this point, only two of our four US centers have received IRB approvals for the new cohort. We anticipate completing enrollment of our cohort 2a patients near the end of Q2 of this year. So if the two institutions that do not yet have IRB approval do not receive it in the next couple of weeks, we will authorize the other two sites to enroll and treat the remaining patients in the cohort. They have committed to do this."
This means that within the next couple of weeks the company should have four of the new types of patients treated. We can also infer that only half of the sites completing the trials have approval to proceed. That could answer the question as to why there have been delays in the trials. Mr. Rabin elaborated further as he made the following statement when fielding a question from an investor on the conference call:
"I think it is important for people to understand that in a safety trial, to go from treating patients that are legally blind to patients that still have rescuable photoreceptors and fairly significant amounts of visual acuity, is a pretty heroic leap, both on the part of the IRBs, as well as the DSMB and the FDA. So this is a process that takes time, and I think is logically being pursued methodically by these organizations, and while of course we would like everything to happen faster, we're not at all frustrated with it and we're working with these institutions to get everything cleared."
Although any delay is concerning, the circumstances surrounding ACTC's trials is understandable. What is most reassuring is that the company and two sites that have approval have agreed to enroll and treat the remaining patients if necessary. This in itself should say something about how critical these clinical trials are being viewed by all parties.
Observation 2 - Results of New Tests
With the protocol change to include patients with earlier stages of the diseases, ACTC dynamics has changed. This means that the plan will now be to rescue photoreceptors that are in a dormant - rather than dead - stage. The safety aspect of the trial seems to have been addressed. Now the question is if the SMD and AMD disease can be halted or the effects reversed. If the answer is yes, then ACTC would hold the key a very large and valuable unmet medical need. So back to the question of the day, what are the initial results thus far?
Small biotech companies do not like to report their results in a rushed manner. Patient privacy, FDA regulations, and a host of other SEC rules keep trial results under wraps until the appropriate time. Of course there are always bits of information that can be gleaned from a variety of sources. ACT's management has usually been very forthcoming with certain aspects of the results. In the latest conference call the company reiterated the clinical results for patients treated earlier in the trials. Consider the following statements from the CEO on the last call:
"We have observed the persistence of visual acuity gains and the engraftment of the transplanted cells in both the SMD and the AMD patients, which is consistent with what was previously reported on earlier in the trials."
"Many patients, as you know, have reported improvements in their everyday lives, some having their vision improved from being able to see hand motion only to being able to read parts of an eye chart, as well as, importantly, developing better color recognition, contrast and low-light vision."
What we take from this is that the earlier stage patients are doing well. The real question is what is the company seeing with the new patients under the protocol change? This is the key to the future for ACTC and its investors. Once again let's look at a quote from the latest conference call:
"We have a meeting with our Ophthalmic Advisory Board and all of the investigators in early October and by then we will have three-month results from cohorts 2a and 3. Based on what we have seen to date, we are planning to review the data we have with our investigators, consultants, and the DSMB and will evaluate the benefit of terminating the Phase I portion of that trial, which was initially planned to treat patients with a 200K cell dose, and instead advance to a new protocol, or series of protocols, for Phase II studies. Determining the end points for Phase II of the trial will of course be critically dependent upon what we have seen from the evaluations of the cohort 2a and 3 patients, but what we have seen so far has been very tantalizing."
From this quote we can derive lots of useful information. First, it seems that October 2013 will be a critical timeframe for the company. That is when ACTC, the Ophthalmic Advisory Board, and all of the investigators will meet to review the results of the patients with the new protocols. From this we can determine that the trials involving patients from cohorts 2a and 3 should be completed by that date. At that time a decision will be made is in regards to the benefit of terminating the Phase I portion of the trial and instead advance to a new protocol. What is interesting here is that ACTC has not even treated half of the patients under the new protocols before announcing this October meeting. This meeting agenda seems to entail how to advance to the new protocols under Phase II studies if the Phase I portion is terminated.
If this was the only statement, then I would not see this information as particularly useful. It was the last line that caught my attention. For some reason the words "very tantalizing" stood out in this interview. Quarterly reporting by biotech companies are usually not very exciting affairs. Going over medical terminology and financial terms are fairly mundane at best. A word like "tantalizing" falls outside the normal vocabulary one would expect in this setting, especially since so few patients have been treated at this time. Maybe the CEO is referring to the animal models or preclinical trail data. Or perhaps he was referring to the results of the first treated patient under the new protocol?
Obviously investors do not have enough information to make a final determination on exactly what was so tantalizing. That being the case, all we can infer is that something aspect of the trials seems to have the CEO rather excited. By the October timeframe it should become clears as to what that might be.
Observation 3 - Form 4 Issues/Problems
In April 2013 ACTC filed a Form 4 in its SEC filings. Unlike most Form 4s filed by the company, this one had some noted problems. Per the filings it seems that the CEO's reported sales of shares of common stock were not being reported on in a timely basis by the reporting person. As a result of the misreporting the number of shares owned by the reporting person was also being misstated and a correction had to be noted where an increased by 3,853,563 was logged.
The recording of stock transactions by corporate officers is a very serious business and not to be taken lightly. This error on the part of ACTC is concerning to many investors, and during the conference call a question was directed at the company to provide further details. In response the CEO stated that:
"Look, as you all know, I have been working to get this company cleaned up for the 2+ years that I have been here and this is obviously very frustrating. What I will say is that the independent members of the board are conducting a review regarding the circumstances surrounding this, as well as our internal training policies and procedures. After they have completed that review, we'll make any disclosures deemed necessary. I can't really say anything else about that now."
This statement by the CEO is basically another way of saying "No Comment". While this reply was short, I feel it was appropriate for the venue at that time. Answers to these type issues need to be addressed at the Board of Directors level and not aired out on a question/ answer session at the end of quarterly conference call.
With small biotech companies the corporate officers are often times compensated with shares of common stock. Regularly scheduled selling of stock is quite common in this industry. On top of this, most small companies have very limited staffs in their financial branches. In the case of ACTC, the company currently does not even have a Chief Financial Officer in place. That being the case, many tasks like SEC filings are often farmed out to third parties for completion. While none of this is an excuse, it is easy to see how important items like a Form 4 could be misreported.
While I might give ACTC and its management a pass on this for now, I will be very interested to see what the independent members of the board have to report. What I will take away from this event is that ACTC and its management is being spread very thin. The hiring of a CFO would be a good start to help address issues. In fact, this is even mentioned in the latest conference call when Mr. Rabin states:
"We are very close to hiring an experienced CFO. In fact, we have a handshake agreement and are now about to begin negotiating the employment agreement."
For now the Form 4 problems can go on the back burner for me. What will drive the company and its stock price is the science and potential joint ventures that could follow.
Observation 4 - Joint Ventures, Reverse Splits, Up listing
The goal of most speculative biotech companies is to enter into a joint venture (JV) with a major big pharm/biotech company. These joint venture/partnerships offer many advantages to these small companies. While the actual details may vary, many JVs entail upfront cash payments, future revenue sharing, and stock purchases on the open market. In this regard ACTC is looking for a similar situation. Consider the following quote from the CEO on the latest conference call:
"We have made it clear that we have a significant objective this year to achieve an uplisting and to achieve a form of partnership with a large credible organization. Those are two important objectives to us. They are important objectives to the company's overall compensation program, and they are important objectives to everyone as shareholders, and we have not backed away from that one iota. So everything that we are doing is keeping in mind trying to achieve those two objectives."
ACTC is a small company with limited resources and no revenue. The net cash used in operations for the 2013 first quarter alone was $8.3 million. This means that ACTC should be funded into early 2015 before the company runs out of cash. To survive ACTC will have to partner its technologies. Luckily for the company, its trials seemed to have attracted the attention of some potential partners. Back in my February 2013 interview with ACTC, Mr. Rabin made the following comments:
"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. "
"We just cannot leave that much value on the table when you are going after markets this big. A small percentage of the market share of these massive degenerative diseases, with reasonable reimbursement rates, calculates into enormous revenue figures. With this program we have to make sure that people understand the efficacy. We need to advance the ball through Phase I and start Phase II. This is when you see these big changes in valuations from the pharmaceutical companies."
When you put these three statements together you get a very interesting picture. First is that ACTC is not going to enter into a joint venture for the sake of doing so. The company obviously wants sizeable upfront payments and generous revenue sharing agreements. ACTC also realizes that Phase I trials in themselves do not carry enough weight to sway the larger pharma/biotechs. Is this why there was a big push to initiate the 2a and 3 cohorts that focused upon efficacy rather than safety? My bet is that ACTC is banking on stellar results from these patients in the 2a and 3 cohorts. Hopefully the results are good enough to bring the larger pharma/biotech firms to the auction table by the end of the year. Since the establishment of a partnerships is an important objectives to the company's overall compensation program, it is in ACTC's and the shareholder's interest to see this happen.
If a deal can be reached, then an up listing off the bulletin boards to the NASDAQ would occur shortly thereafter. Depending on how big the deal may be would dictate the need or ratio of a reverse split to make the up listing possible.
Obviously this is just a small bit of detective work on a much larger developing story. Could I be wrong and my assumptions completely off base. Yes that is definitely possible. The fact is that no one has all the answers as to how an investment in ACTC will turn out. That being the case, it seems that the last quarter of 2013 will be a critical time for the company. Will the new clinical tests be wildly successful? Will the company enter into one or several JV with an up listing to the NASDAQ? The answers to this and lots of other questions should be answered by the last quarter of 2013. Until then, stay tuned.
Disclosure: I am long ACTC.OB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.