2014 has been a great year already for stem cell therapy stocks. So far, ThermoGenesis (KOOL) has risen from $1.02 on December 31 to as high as $3.24 before settling over $2 recently with most of those gains due to statistically significant Phase Ib clinical trial results. Athersys (ATHX) has risen from a 2013 closing price of $2.50 to over $4 before pulling back slightly with greatly increased daily trading volume for January thanks to it being granted patents in Japan for its stem cell and regenerative medicine technology to go along with financial support.
Cytori Therapeutics (CYTX) is another cell therapy stock that has several positive catalysts going into 2014. It has government support on one of its projects, data due on its cardiovascular treatment trials, plans to expand its pipeline this year and recently attained large investor backing from Lorem Vascular to expand its commercial sales presence in the East.
One near-term catalyst for CYTX is the result of the preclinical evaluation of the company's cell therapy procedure for the treatment of thermal burns specifically for anyone exposed to radiation. The company signed a developmental contract with the Biomedical Advanced Research and Development Authority (BARDA), a part of the United States Department of Health and Human Services. Such a therapy would be of interest to the US to remain prepared in the event of a nuclear disaster.
Keay Nakae, senior research analyst for Ascendiant Capital Markets commented on the timing and possible impact of the agreement:
"The company is currently doing work under Phase I of the contract, which provides the company $4.7M to complete a number of tasks, the most significant of which is a preclinical evaluation of the product. That work is expected to be complete in Q1/14, and at that point the company will show the results to BARDA. The hope is that Cytori will then qualify to move into the more significant second Phase of the contract, which would provide the company with up to $56M in additional funding to conduct a pivotal study in the U.S. with the goal of having the therapy receive FDA premarket approval (PMA)."
If the data supports moving on to the second phase of this agreement, it can be extended for up to $106 million over 5 years to get it through the FDA approval process for application to all thermal burn injuries. Severe burns are an infrequent but costly event in the United States. This June 2011 study shows that burns account for only 1% of all hospitalizations in the U.S. but cost $10.4 billion a year to treat because of the high per person cost and the tragic nature of the injuries. Most burns occur on the job which fall under the realm of worker's compensation, and some injuries can cost as high as $10 million for a single claim according to the White Paper titled "Volatility and Complexity in Burn Injury Claims" by Paradigm.
The article titled "North Korean Threats And The Cytori - BARDA Stem Cell Collaboration", among others, by Wall Street Titan goes into further detail over the BARDA agreement. The author speculates that an ally of the United States as well as Cytori's current top revenue generator like Japan would have a great interest in this therapy given the country's proximity to politically unstable North Korea and the disaster surrounding the Fukushima nuclear plant.
While the BARDA agreement may end up paying for the FDA approval process and gain CYTX access to the annual $10 billion burn treatment market, the company's primary goal is the treatment of cardiovascular disease. Another pair of Cytori's major 2014 catalysts are the continuation of data released from the PRECISE trial in Europe (27 patients - 21 treated, 6 placebo) and preliminary results of the ATHENA study in the United States (90 patients - 30 heavy dosage, 30 light dosage, 30 placebo). It's the first test of its kind in the U.S. in which cells are taken from a patient's own body fat tissue in order to treat a severe form of heart failure.
The key primary endpoint of these trials according to Cytori is the VO2 Max which looks at the maximum oxygen consumption of the heart muscle and is a good indicator of the functioning capacity of the heart. Page 15 of the investor presentation shows the impact of the VO2 Max on the 21 patients in Europe who took the ADRC treatment versus the 6 on the placebo. The placebo group continued to see a decline in the VO2 Max as their condition worsened while the individuals treated saw a slight improvement at the 6-month mark and remained stable at the 18-month mark. Of particular note is that the treated group on average started off at a much lower capacity than the placebo group as they were further along in the disease but after 18 months had higher capacity. It will be interesting to see the impact of the treatment on healthier patients on a larger sample size in further studies. 6-month data from the Athena trials are expected in 2014.
Cytori plans to expand the clinical use for its cell therapy technology with an IDE Trial for Hamstring Injuries announced on January 13 with a 90-day assessment on 10 patients. CYTX's CEO Christopher Calhoun explains how this trial has an opportunity to get approval for commercialization quickly as the hamstring is relatively simple to deal with in comparison to the heart.
When looking at CYTX's Q3 10-Q filing and considering the recent agreements signed, there is evidence that the business is undergoing a turnaround after years of financial stagnation. Revenue for Q3 2013 was $2,711K which was up 106% from $1,316K for Q3 2012. Q3 year-to-date revenue was $8,736K versus $7,175K last year so the increase for YTD 2013 can be attributed to the past quarter. The increase in year-over-year revenue is largely due to development revenue led by the BARDA contract which accounts for $2,503K thus far in 2013. Product revenue grew 23% from $1,314K to $1,616K from 2012 to 2013 for the third quarter compared to the first half of the year where it was just $2,800K for 2013 versus $3,427K for 2012.
Once the full year financial results are disclosed, investors should pay close attention to the Q4 YoY product revenue to determine if Q3 was just an aberration in timing or if product sales have truly picked up since bottoming out in the first half of the year. The company stated in a webcast on January 13, 2014 that it saw a record amount of shipments for Q4 of 2013 around the 21:30 mark of the presentation so there is evidence to suggest that the growth in product revenue will continue. Full year results are expected on March 6th.
The operating loss for Q3 2013 was $8,461K, down from $10,332K while the YTD loss has decreased $4 million to $21,562K. The operating loss is headed in the right direction however it still implies the company will need an infusion of cash. Looking at Cytori's balance sheet, the company had $18,093K in current assets while current liabilities were $12,644K at the end of Q3. Cytori signed an agreement with Lorem Vascular which included a placement of 8 million shares at a price of $3 per share. The infusion of $24M in cash ensures that the company has enough cash for operations and stays within its debt covenants for at least the next 12 months according to statements made in the latest 10-Q.
The market for cardiovascular therapy is enormous in China with over 230 million people with some form of cardiovascular disease. The deal with Lorem includes up to $500 million in license fees over the next 30 years for the licensing rights to use Cytori Cell Therapy in China, Hong Kong, Australia, Malaysia and Singapore with a purchase commitment of $7 million in Celution® devices and consumables in 2014 following regulatory approval in China. In addition to the license fee, there is a 30% royalty fee over the 30 year term on the gross profits on all sales in China, Hong Kong and Malaysia. This purchase commitment from Lorem along with the BARDA opportunity of up to $56 million would result in a large increase in Cytori's revenue for 2014.
The risk of an investment in CTYX would be further dilution of shares until the company becomes profitable or if the company needed to replace its $25M in long-term debt with equity. Assuming a static stock price around $3, a continued $30 million a year in losses for 2014 and 2015 and the call in of debt at $25M would imply a needed capital infusion of $85M or about 28M more shares added to the 75M share float. I believe that with the gross margin made on the sales to Lorem, continued organic commercialization expansion and the allocation of overhead as outlined in the BARDA contract offset by increased costs on the ATHENA trials, the operating loss and cash burn rate currently seen in the company's financials will be lower. There are 4,771K warrants trading under the symbol of CYTXW expiring in September 2014. Each warrants allows for the purchase of 1.4 common stock at a price of $2.59. Full exercise of the warrants would add 6,679K of stock for proceeds of $17.3M and 9% dilution of the stock. An assumption of minimal dilution assumes a partnership agreement is achieved for the cardiovascular therapy upon completion of later-stage data for PRECISE and ATHENA.
I believe CYTX is undervalued at around $200 million in market cap and represents an excellent risk to reward profile for those investors interested in speculative biotech companies. With the recent financing and large agreement with Lorem, the long term downside for the business is limited should the studies face some setbacks. But the short-term upside is high if either the BARDA or ATHENA results are favorable. Because of these short term catalysts I have bought the Cytori Therapeutics warrants in addition to the stock. The warrants offer a great leveraging opportunity considering the near-term volatility I expect will occur on CTYX stock.