This is a follow up to my prior article: BioTime Joins Advanced Cell Technology In The AMD Race. A lot has happened in the three-week span since I wrote the article. Advanced Cell Technology (ACTC) filed their 10-K and had a conference call to discuss the results and provide a corporate update. Also, the main thesis behind my prior article was BioTime (NYSEMKT:BTX) had freedom to operate in pursuing hESC derived Retinal Pigment Epithelial Cells (RPE for short) for the treatment of Age-Related Macular Degeneration (AMD for short). We speculated that licensing agreements acquired by BTX over the years, including licensing directly and indirectly from ACTC itself, allows BTX freedom to operate within ACTC's patent protections. In the end, we have to admit our speculations were just that, disputable speculations. Since the article, we focused our research specifically on what ACTC's patent protections provide. We believe results of our findings, which will be outlined in this article, are highly significant for both companies and their existing and potential shareholders.
Wiping the Slate Clean
"Financial information included in the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K filed by us prior to March 10, 2014, and all earnings, press releases, and similar communications issued by us prior to March 10, 2014, should not be relied upon and are superseded in their entirety by this Annual Report on Form 10-K."
You don't see that every day. ACTC disavowed every public disclosure in the history of the company prior to March 10, 2014! The 10-K issued on March 10th and the conference call that followed was a new beginning of honesty, frankness, and professionalism for the company. Credit goes to Ted Myles, Interim President, CFO and EVP of Corporate Development and the ACTC board for breaking from the past.
In the 10-K, ACTC admitted for the first time they owed additional shares to prior warrant holders that are suing the company. The disclosure resulted in a litigation settlement contingency of $6.2 million. I won't speculate on whether or not this amount will be sufficient to cover the final settlement, but it appears that a floor has been created.
ACTC is running low on cash and will need a capital raise by the end of the quarter. Additionally, Gary Rabin (the prior CEO) received a Wells Notice from the SEC, which indicates the SEC may bring a civil action against Mr. Rabin for his unreported stock trades. I don't expect to see many shareholders lined up to defend Mr. Rabin's actions.
A brief update from ACTC's conference call before we dive into the main focus of our article. We learned that ACTC hopes to complete their Phase I trial for AMD by the end of the year and hopefully begin a Phase II by that date. We also learned that interim data from the trial will not be press released as most had hoped and the company itself had previously guided. Instead, the data will be published, "if at all," in a top-tier peer-reviewed scientific journal. This of course is the right approach from a credibility standpoint and I think new management is all about establishing credibility but it gives little comfort to existing shareholders who are looking at additional dilution and considerable litigation settlement expense on the near horizon.
A Deep Dive Into ACTC's Patents
The basis for our thesis in our prior article was that BTX (via its subsidiary Cell Cure Neurosciences Ltd.) has freedom to operate using RPE cells as a cell replacement therapy for macular degeneration, and therefore is a good investment choice given AMD's $30 billion market potential. The basis for our conclusions revolves around BTX's ability to operate within ACTC's patent rights. A logical approach was to look at BTX's patent portfolio and review prior licensing agreements. BTX has an extensive IP with over 600 patents. Last year, they also acquired Geron's hESC's IP, which predates ACTC's. As a reminder, Dr. Michael West, BTX's CEO was the founder of Geron and a prior CSO and CEO of ACTC. Dr. West specializes in patents and wrote many of the early patents for both companies. Between his licensing arrangements with ISCO, ACTC, Geron, and BTX's own patents, Dr. West is confident he has sufficient patent protections. However, that still doesn't answer the question; does BTX infringe on ACTC's patent rights? That question led us to review ACTC's main patents around their RPE program.
We started with ACTC's key RPE patent #7,794,704. The claim starts with, "A method for treating retinal degeneration in a subject in need thereof, comprising: [A] producing an enriched population of human retinal eqithelium (RPE) cells by..." which is followed by the method used. So far, so good. We took it a step further and compared the method to existing papers that describe the methods used to create RPE cells. In every case, we found a discrepancy between ACTC's methodology as outlined in the patent and actual methods used.
Making Patent Sausage
The patent process for ACTC's key RPE patent started in January 2005 with an application to the US patent office claiming:
A method of treating or preventing retinal degeneration, comprising use of a cell selected from a group consisting of at least one of: RPE cells, RPE-like cells, RPE or RPE-like progenitors derived from mammalian embryonic stem cells.
The application included a 29-page specification titled; "Improved Modalities for the Treatment of Degenerative Diseases of the Retina," which describes the invention. On page 16 of the specification, the method is described as follows:
In the growing optic vesicle RPE and the neural retina share the same bipotential neuroepithelial progenitor, and their fate was shown to be determined by Pax2, Pax6, and Mitf.
It goes further and states:
cells of neural retina can transdifferentiate into RPE in vitro, so alternatively, tubulim beta III and Pax6 positive cells could represent a transient stage of such transdifferentiation of co-isolated neural cells or neural progenitors into RPE-like cells.
I know it doesn't make sense yet, but remember this statement.
From the point of application to final approval many years later, the patent process took a life of its own with periods of rejections due to prior art followed by amendments to the claim to keep the application moving forward. After years of back and forth, the US Patent Office issued a Non-Final Rejection on 8/25/2009 and ACTC's remarks and amendments to the claim were filed on 2/25/2010. The amended claim states:
Regarding step (iv), paragraph 0065 describes detection of bestrophin and paragraph 0068 describes absence of Pax6 expression from cell having pigmented epithelial morphology.
At this point, I ask the reader to indulge me a little longer. This quote along with the one in the prior paragraph are critical in understanding the issue at hand.
The prior art cited by the examiner alongside the Non-Final Rejection on 8/25/2009 included:
- "Gepstein et al: Derivation and potential applications of human embryonic stem cells"
- "Motohashi et al: Induction of melanocytes from embryonic stem cells and their therapeutic potential" and,
- "Zhou et al: Novel PAX6 binding sites in the human genome and the role of repetitive elements in the evolution of gene regulation."
To move the patent forward, ACTC had to amend the claim in order to avoid the prior art.
By now the astute reader is starting to realize the importance of Pax6 in the invention. The original specification called for Pax6 positive cells and during the process of amending the claim to avoid prior art the claim changed to "Pax6-". As a matter of fact, the dependent claim in the final patent states:
culturing said human RPE cells selected in step [III] to form a cell monolayer containing cells that are Pax6-.
Nowhere in the patent claim does Pax6-positive appear other than by way of example and in the specification.
What is Pax6 and why does it play such a critical role in RPE development? Pax6 is a protein that is encoded by the Pax6 gene. The gene is critical for the development of eyes and other sensory organs. When the gene is expressed as in the original ACTC specification it is Pax6-positive. When it is not expressed as is the case in the final patent claim, it is Pax6-negative. Research has demonstrated the expression of Pax6 can have a dramatic effect on eye development. Simply stated, Pax6 is a gene marker used in the method of developing RPE cells. However, studies have shown, when Pax6 is expressed at low levels, Pax6-negative contributed only poorly to the neural retina. Yet, ACTC's patent claim clearly states Pax6-.
ACTC's Patent Vs. ACTC's Scientific Methods
The information presented so far leads to the obvious question: Has ACTC found a method for generating RPE cells absent of Pax6 expression and are they using those RPE cells in FDA trials to treat humans with AMD? A review of ACTC's RPE pre-clinical paper and their interim trial paper in the Lancet should help provide some answers. The pre-clinical paper titled "Retinal Pigment Epithelium" states the following:
It is possible that cells producing signals promoting RPE specification in clusters of Pax6-positive progenitors, similar to the signaling of ocular mesoderm in patterning ocular tissues, could be found among such differentiated cells next to Pax6-positive clusters.
More specifically and in greater detail the Lancet paper states:
transient marker of neuroectoderm differentiation, Pax6, and RPE markers, RPE65, bestrophin, and MITF, were expressed at high levels. In mature cultures greater than 99% of the cells were positive for ZO-1 and bestrophin, PAX6, or both (PAX6 disappearing in more mature cells). After cypopreservation, cells were thawed and formulated for transplantation. Staining for PAX 6, MITF, or both was done on formulated RPE cultured overnight, confirming greater than 99% RPE purity. After further culture PAX6/bestrophin and Zo-1 immunostaining was similar to preharvest cultures...
Nowhere, with the exception of the mention of more mature cells, is Pax6-negative mentioned in the clinical trial paper. The robust level of Pax6 is illustrated in a graph comparing the referenced RPE lot and the clinical RPE lot. In other words, the actual RPE cell line used in the trials, hESC-MAO9, are Pax6-positive. Absence further evidence, it appears that Pax6-positive is being used in the actual trials while Pax6-negative was used for patent approval.
My original thesis was that BioTime had freedom to operate and move forward with their plans to file an IND with the FDA and begin human trials for the treatment of AMD using hESC derived RPE cells as a replacement therapy. In order to do so, they needed to demonstrate the ability to operate within ACTC's patent protections for the same therapy. My research began with a review of BioTime's licensing arrangements, which was inconclusive. I next started reviewing ACTC's patent rights around RPE. That review led to what appears to be a discrepancy between ACTC's main patent and its therapeutic approach. I've laid out the facts as I see them. I will leave it to the reader to draw their own conclusions.
There's been very little discussion of investment risk so I'm going to conclude with this. Investing in developmental stage biotechs is highly speculative and risky. The high majority of times, if you buy and hold, you will lose, and often lose big. The road to commercialization is long and full of peaks and valleys. Take profits when offered, and most importantly, diversify. My approach is to invest across the entire risk spectrum in order to increase my overall returns while maintaining an acceptable level of overall portfolio risk. Based on one's risk tolerance there is a place for highly speculative stock, but concentration risk should be avoided.
Disclosure: I am long BTX. 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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