Advanced Cell Technology (ACTC) is a developmental stage biotech with the first FDA approved human trials for the treatment of AMD and SMD using hESC. They are nearing the end of their Phase 1 trials and expect to present interim data any day now.
ACTC is at an inflection point of sorts both from a management perspective and a science perspective. By looking at ACTC's past and their present, we will try to determine if the inflection point offers an investment opportunity.
Last week was eventful and interesting for the ardent followers of ACTC, and there are many. On January 22nd, the company announced the immediate resignation of their CEO and Chairman, Gary Rabin. For most stakeholders, it was not a surprise.
Activism in Penny Land
On April 15, 2013, ACTC filed a Form 4 with the SEC revealing their CEO had sold a large number of shares over a two and a half year period without filing the proper disclosure forms. Before the filing, shareholders had assumed the CEO was maintaining his ownership interest in the company. What followed is somewhat rare for small retail investors who invest in penny stocks. A timeline was created that matched the CEO's trades with major company events over the two year period and was circulated in various investment forums over the internet. Some took the information and reported it directly to the SEC while others created a shareholder petition which was submitted to the Board of Directors requesting an investigation. The company has since reported the SEC has started an investigation into the disclosure delays and the company's Section 16 compliance procedures.
A Little History
For most who follow the company, ACTC's history is well documented and known so I won't spend much time rehashing it here. However, since it's still impacting the company, it's worth mentioning. Like most startups, ACTC had difficulty attracting capital and resorted to very punitive PIPE financing arrangements with resets and anti-dilution provisions that captured additional shares for future transactions that were executed at a lower stock price. However, in ACTC's case, they did not disclose these future transactions to the existing debt holders. ACTC eventually settled with close to 50 claimants. One large settlement in particular, resulted in the issuance of a convertible debenture (as ACTC's stock price goes lower, more shares are issued for payment of the debt). A separate large claimant does remain however, and litigation is ongoing.
During this time, ACTC also resorted to a scheme to raise capital that involved settling outstanding claims through the court system using fairness hearings. However, the claims were settled in shares of the company substantially above the amount actually owed and ACTC was provided a cash kickback that was not disclosed to the courts. The SEC charged ACTC with fraud and the case was recently settled for over $4 million, which will be paid in installments over a period of time.
I would argue these historical events are relevant today for a couple of reasons. First, it sets the backdrop for what I consider is an inflection point in the management of the company. Second, it is a reminder that ACTC, a company with limited resources, is still haunted by its past and paying the cost now and into the future.
A New Team, A New Day
With the resignation of its CEO, ACTC's CFO Ted Myles, is acting as interim President while a search is underway for a new CEO. Mr. Myles joined ACTC as their CFO in 2013 and has extensive pharma experience. Also, a board member, Michael Heffernan, with extensive pharmaceutical and healthcare experience, has stepped in as Chairman. Other members of the board, including Robert Langer, are also considered highly regarded. With the events of the past week, ACTC is finally ready and positioned to break from its troubled past and has an experienced, professional board to guide them.
I would also argue that the release of interim data offers the second inflection point. Early in the trial after only two patients were treated, the company published results that suggested the procedures were safe and that some of the cells were surviving and functioning as intended. Since this first, very preliminary report, there have been documented indications of efficacy both from the company and some of the patients themselves. So the interim data should be a value creating event for shareholders if expectations hold true.
Interim Top Line Data
Since the Phase 1 trial has not been fully completed, the release of data could be considered interim top line data at best. I believe the reason for releasing interim data is due to the status of the company's finances. Currently, ACTC depends on a financing arrangement with Lincoln Park Capital (LP) which basically works like an ATM machine. ACTC requests funding from LP and LP provides the cash for shares that are sold into the market causing dilution a dribble at a time. The draws have fairly limited caps on the amount allowed per draw to allow time for LP to dispose of the shares. So basically, ACTC is surviving paycheck to paycheck so to speak.
The company needs to capitalize sufficiently to operate its ongoing trials, fund research, and cover the costs associated with legacy issues as described above. The CFO has indicated there will be a smaller capital raise in early 2014 and a larger "re-IPO" later in the year. Considerable dilution appears on the near horizon. I don't think ACTC is in a position to raise the necessary capital without sharing trial results first and the results need to be meaningful. I expect it will be.
The release of trial data should be a value creating event for shareholders. But, the company will most likely use that additional value as currency to raise permanent capital, thereby diluting the value that was created. An obvious approach is to buy the rumor and sell the news. As a long term shareholder, I like to maintain some ownership in the company but also believe in taking profits when they are offered. That said, the road to commercialization is long and ACTC has miles to travel before they reach the end. With the past behind them, the road ahead does look brighter.
Disclosure: I am long ACTC. 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.