This is a continuation of our series of articles focused on early-stage biotech companies in a race to treat incurable disease with the use of regenerative medicine. For background and point of reference, our prior four articles are listed below.
- "Advanced Cell Technology: A Balanced Perspective Or Risk And Reward" - This article summarized the legacy issues involving Advanced Cell Technology and future potential of the company. Prior management left the company at the end of 2013, and the company is still working through litigation associated with past financing arrangements, but trial results are expected in the near future, which should lift the stock.
- "StemCells, Inc., And Neuralstem, Inc.: A Side-By-Side Analysis" - This article compared the science and progress of StemCells, Inc. and Neuralstem in the use of neural stem cells to treat central nervous system disorders.
- "StemCells, Inc. And Advanced Cell Technology: The Race To Treat AMD" - This article compared the science and progress of StemCell's neural stem cell platform to Advanced Cell Technology's RPE platform for the treatment of AMD.
- "Neuralstem And Brainstorm Cell Therapeutics: The Race To Treat ALS" - This article compared the science and progress of Neuralstem's neural stem cell platform to Brainstorm's bone marrow-derived mesenchymal stem cells for the treatment of ALS.
It's important to understand the backdrop that led to BioTime (NYSEMKT:BTX). Two of the prior articles focused on Advanced Cell Technology (ACTC), a hESC company in Phase I trials using Retinal Pigment Epithelial Cells (RPE for short) to treat Age-Related Macular Degeneration (AMD for short). As I stated in my prior article, AMD represents a huge $30-billion market afflicting more than 30 million people worldwide, with no current medical treatments available to stop or reverse the progression of the disease, which eventually leads to blindness. The stakes are high. Investing in development-stage biotechs offers considerable risk and, as my prior article indicated, even more so considering ACTC's past and present issues, but the treatment of AMD has tremendous upside.
A brief update on ACTC; its checkered past is catching up to it, which is good and bad. Getting the legacy issues behind it is a positive for the company as it moves to get its financial affairs in order and prepares for a Phase II trial (and eventually an uplist to NASDAQ), but ripping off the band-aid will be painful. It recently announced it was having to restate its financial information for the past four fiscal years and quarterly periods in 2011 and 2012 and first three quarters of fiscal year 2013. The restatement relates to warrants that were issued in 2005 with full ratchet anti-dilution provisions. The most troubling part of the disclosure was the evaluation of loss contingencies, as it relates to ongoing litigation with the two warrant-holders in question. It appears the legacy issues I highlighted in my prior article are coming home to roost.
My research into the treatment of difficult and presently incurable medical conditions with regenerative medicine, and in particular in this case Age-Related Macular Degeneration, led me to BioTime and the incestuous relationship between ACTC and BTX. BTX's CEO, Dr. Michael D. West, was a prior CSO and CEO of ACTC. He was the founder of Geron prior to arriving at ACTC, and is a pioneer in the science of embryonic stem cells. Geron was the first company to pursue hESC, and had an extensive hESC patent portfolio thanks to Dr. West's efforts, until Dr. West's BioTime reacquired them last year, when Geron shut down its spinal cord trial. The Geron patent acquisition wasn't the first for BioTime, or the most significant.
ACTC Gives Away The Goods
In July 2008, when ACTC was struggling to make ends meet (even more so than today), the then CEO, Bill Caldwell called his predecessor, Dr. Mike West, and struck a deal. ACTC entered into an exclusive licensing agreement with Embryome Sciences, Inc., an affiliate of BioTime. The exclusive licensing agreement granted the Licensee the rights to key ACTC's stem cell lines, patent rights, and know-how. Since the license agreement, BTX has used the IP to sublicense to other researchers and to progress its own hESC platform.
The opinion by many ACTC investors that ACTC owns the hESC space is a misnomer; it's spread out across the institutional research landscape thanks to BTX's sublicensing efforts, and any royalties down the road will end up in BTX's coffers, not ACTC's. Also, any future patent litigation and recovery belongs to BTX. What did ACTC get for giving away its extensive patent portfolio and stem cell lines? ACTC received a $250,000 upfront fee and future royalties of 8% up to $1,000,000. However, most, if not all, of the potential revenue was assigned to a landlord for back rent.
Per the agreement, ACTC had the option to license back exclusive rights to its RPE, hemangioblast, and myocardial cells, and non-exclusive rights to hepatocytes, all of which was and continues to be ACTC's main focus. To ACTC's credit, it realized it didn't have the resources to pursue the extensive overall potential of hESC and, therefore, chose areas that offered to greatest opportunity to move the science forward. I would say this is the sweetest deal for BTX in regenerative medicine history, but ACTC one-upped itself with its next licensing deal.
In November 2008, ACTC created a joint venture with Cha Biotech Co. (CHA for short), a South Korean company, whereby ACTC gets 40% ownership and Cha Bio gets 60% ownership of the partnership. The partnership has an exclusive worldwide license for ACTC's hemangioblast program. Hemangioblasts are used for the treatment of blood and cardiovascular diseases, and for the production of blood itself, which obviously has huge medical potential. For $250,000 paid to ACTC, the partnership sublicensed the platform to CHA for exclusive use in South Korea.
In March 2009, ACTC provides CHA an exclusive license for South Korea for its retinal pigment epithelial technology and its single-cell biopsy technique as well for a $750,000 upfront fee and an additional $350,000 shortly after the agreement was executed, $300,000 when the FDA approved ACTC's IND and another $500,000 if CHA receives grant monies.
In July 2011, ACTC licensed back exclusive rights for the hemangioblast program for North America and Canada for $820,000, while CHA obtained exclusivity for Japan out of the deal. ACTC was also required to spend $6.75 million to progress the program by July 31, 2014 to maintain the license.
So, assuming CHA has not received the grant, ACTC nets $580,000, while spending $6.75 million and giving CHA exclusive licensing for South Korea and Japan for its hemangioblast program and exclusive licensing for South Korea for its RPE program and 60% worldwide licensing excluding the US and Canada for its hemangioblast program. That, in my opinion, is the sweetest deal for CHA in regenerative medicine history! ACTC's fight for survival as a development-stage biotech with no revenue and difficulty obtaining capital led to agreements that were extremely costly to the future of the company.
The history of ACTC's licensing activities is important when evaluating the company's IP and potential for other therapies. As of 2008, ACTC had rights to RPE, hemangioblast, myocardial cells, and hepatocytes, assuming it properly executed its option and met the conditions of the agreement. With ACTC and its history of not honoring contracts, that's a big assumption.
BTX Patent Portfolio
Back to BTX. With the acquisition of ACTC's patents, Geron's patents, and its own patent efforts over the years, BTX has accumulated a massive portfolio with over 600 stem cell patents. BTX attempted to obtain a RPE patent in 2011, and was rejected due to ACTC's prior art. So, the question is, does somewhere in that extensive patent library allow for BTX to support its RPE platform? I asked Dr. West that question directly, and his response was affirmative. His exact quote was he was confident BTX has "freedom to operate" when it comes to using RPE to pursue the treatment of AMD. As expected, he was reluctant to show his hand by identifying specific patents, either BioTime's or a competitor's, but pointed out that the exact language in a patent approval is key. My conversation with Dr. West was interesting. He was clearly extremely knowledgeable and passionate about his life's work in regenerative medicine, and he was straightforward and frank with his answers. But it was up to me to ask the right questions. In that regard, I think I missed the mark but he did, without directly acknowledging it, provide the clues I needed to connect the dots.
The Missing Link
Dr. West mentioned on several occasions during our discussion that BioTime had a license agreement with ISCO, International Stem Cell Corporation. Since I was primarily focused on the license agreement between ACTC and BTX, and had limited time with Dr. West, I jotted down a note but didn't pursue it further. It wasn't until I was writing this article that the light bulb finally went off. Dr. West licensed back the RPE program to ACT, which appeared to give ACT world-wide exclusive rights, because he didn't need them.
After a little research, I discovered a month before the ACTC agreement, Dr. West had struck a deal with ISCO. The agreement between ISCO and BTX specifically states "The products will be produced using technology and stem cell lines we licensed from Wisconsin Alumni Research Foundation ("WARF"), technology developed by Embryome Sciences, technology developed by Lifeline, and technology licensed by Lifeline from Advanced Cell." Lifeline, an affiliate of ISCO, had licensed the technology from ACTC in 2004, which was amended in 2005, which included the retina program. Lifeline not only obtained a license for the IP, it was given access to ACTC's key scientists and lab to ensure the "know-how" was acquired by ISCO. One of the original representatives for ACTC for that deal, you guessed it, was Mike West, PhD, stem cell pioneer and, I would add, very astute businessman.
The agreement between BTX and ISCO allowed BTX to sublicense ISCO's technology, including progenitor stem cell lines used for the development of RPE cells, for research. That research could have resulted in research foundations developing their own IP, which could have been licensed back to BTX to pursue AMD. The agreement between BTX and ACTC involved assets (IP, stem cell lines, and know-how) that was "owned or controlled" by ACTC at the time of the agreement, but how could ACTC have owned or controlled assets, including the retina program, if they were licensed to ISCO years before? ACTC's licensing and sublicensing activity is a tangled web that makes the claim of exclusive rights to its RPE platform difficult, if not impossible to prove.
BTX Announces Plans To Pursue AMD
In 2013, an affiliate of BTX, Cell Cure NeuroSciences Ltd. (Cell Cure), announced plans to submit an IND to the FDA for AMD trials. Cell Cure is an Israeli company owned by BioTime, Hadasit Bio-Holdings Ltd., and Teva Pharmaceutical Industries Ltd. (NYSE:TEVA). Cell Cure has entered into an exclusive license option agreement with Teva to develop and market OpRegen (Cell Cure's RPE cell therapy) for the treatment of AMD. If Teva exercises its option, it will have responsibility for funding clinical trials from that point on, obtaining regulatory approval, and marketing the product. BioTime isn't just entering the race to treat AMD, it's bringing the big guns.
The trials are planned to take place in Israel at Hadassah University Hospital. Cell Cure will use a new method developed by scientists at Hadassah Hospital that has been adapted by Cell Cure to both cGMP and xeno-free conditions to produce the next generation of clinical-grade RPE cells. One reason for the delay in BioTime's progress is due to this advanced, improved method for generating the RPE stem cell line.
The Israeli government is very supportive of regenerative medicine, and has provided grants through the Office of Chief Scientist, along with other funding initiatives. Given this supportive environment, Israel is likely to be next in line to adapt Progressive Approval. The concept of Progressive Approval is, once a therapy is demonstrated to be safe, the company initiating the trials will earn revenue for the treatment during the efficacy phase of the trials. BioTime is way behind ACTC from a trial standpoint, but may be ahead in the race for revenue based on the potential for Israel to adopt Progressive Approval.
Dr. West, as with most CEOs of development-stage biotech companies, is keenly aware of the timeline to market for new therapies. During the decade or more that it can take to produce revenue, a company can go belly-up, or if it survives, dilute shareholders to oblivion. BioTime has a diverse platform of various therapies and products designed to reach commercialization and generate revenue quicker. One such product is a matrix that can be used to support cell transplantation, such as in the case of RPE cells. A full discussion of those products is for another time, but I would highly encourage readers to visit BioTime's website and review the latest presentations.
We've focused our article on AMD because it has huge market potential, and the company that survives that long road to commercialization will reap the rewards, and so will its shareholders. Most retail investors believed ACTC had the RPE replacement approach to treating AMD using hESC locked down. This article is a clear refutation of that belief.
ACTC has spent over two years progressing its Phase I trial. It expects to announce interim data in the near future, which is expected to be positive for safety and signs of efficacy. However, it has a history of toxic financing, broken agreements, and security fraud. I would argue ACTC's market cap has held up well in spite of itself, and that is due mainly to the potential of its therapy platform. I continue to maintain a small, core position in ACTC, because I believe the trial results will be a positive catalyst for the company. But I also believe it will get worse before it gets better.
With a somewhat similar valuation, an investor can become vested in a very similar platform with a company that has no toxic financing or history of malfeasance. Dr. West indicated he has "freedom to operate" in the RPE space, and either through direct IP or a sublicense arrangement with ISCO or a research institute such as Hadassah, I believe him. I'm a believer in the potential of regenerative medicine, which I believe one day will revolutionize the medical industry and provide treatments for incurable disease, such as AMD. My goal is to find companies that I can invest in and make money along the way. After some thorough research, I think BioTime is one of those companies.
Disclosure: I am long BTX, 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.
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