CYTX is up more than 80% since mid-Nov on growing excitement related to the company’s Celution System – primarily used for breast augmentation and reconstruction procedures. Celution separates and concentrates patients’ stem and regenerative cells from adipose fat tissue. Fat is removed from the patient, processed by the Celution system and re-injected into the patient approximately three hours later. The Celution system costs approximately $100,000 and the company will generate approximately $5-$6 million in sales from Celution in 2009 vs $4.5 million sales in 2008. The bulk of sales comes from Europe, as Celution does not yet have pre-market approval from the FDA. Most of CYTX’s current and expected revenue and earnings is from Celution sales.
First, the market is completely misunderstanding the novelty of their technology. There is a misperception that CYTX has developed an advanced, proprietary technique for utilizing adipose derived stem cells (ASCs) in a variety of regenerative medicine applications. ASCs are easily obtained by a series of steps involving centrifugation, digestion with collegenase, washing and filtration with or without a $100,000 Celution system. These techniques have been around for over 10 years and fat grafting has been practiced for decades. A wealth of published literature supports this.
Second, as part of the recently announced interim data (RESTORE 2 data) on Celution in breast reconstruction, CYTX said that the study “reported a high degree of patient satisfaction (73%) at the interim six-month observation period.” However, according to the Journal of Plastic, Reconstructive and Aesthetic Surgery article from August 2008 (Autologous fat transfer - a review of the literature with a focus on breast cancer surgery), patient satisfaction rates from procedures other than CYTX’s were between 80% and 90%. And, according to the FDA website, patient satisfaction levels were 94% for Inamed’s currently approved silicone implant and 94% for Mentor’s currently approved silicone implant. In other words, satisfaction for Celution was lower yet is significantly more costly than already approved treatment methods.
Third, CYTX’s financial situation is dismal given significant shareholder dilution and a weak balance sheet. CYTX had just $13m cash on its balance sheet as of 9/30/09 and is burning $5-$6 million per quarter. The current share count is 38.2 million shares however factoring in all warrants, options, and Seaside financing translates to a fully diluted share count of 63.4 million shares which translates to an enterprise value of greater than $350 million. Current buyers are paying more than $350 million for a company that generates less than $10 million in revenue currently, has negative earnings and cash flow, and has a technology with lower satisfaction rates versus already approved treatment methods.
Don’t buy in to the momentum.
Disclosure: Disclosure: No positions.