On Monday, June 9th, Advanced Cell Technology (ACTC) had a conference call to provide shareholders with a corporate update. The company is at a critical stage, and the update provided valuable insight into how well management is meeting their corporate objectives. By the end of the year, the company's stated goal is to complete a reverse stock split, raise sufficient capital for Phase II funding of its clinical trials, and up-list to Nasdaq.
ACTC has initiated its myopic macular degeneration (or MMD) trial at Jules Stein Eye Institute at UCLA. The MMD trial is a single-site, open-label study. The trial will enroll 12 patients, with cohorts of 3 patients each in an ascending dosage format. Similar to the company's dry AMD and Stargardt's macular degeneration trials, the MMD trial will use the company's proprietary hESC-derived retinal pigment epithelium (or RPE) cells in patients who have progressed to severe forms of myopia, which results in damage to the native RPE. The company expects initial trial results in the first half of 2015.
The MMD trial has been in the planning stage for a while, and the conference call did not provide shareholders with an estimated starting date, as hoped.
The AMD and SMD trials continue to progress, albeit at a very slow pace even by FDA standards. The US trials "are poised" to start enrollment of the highest-dosage cohort of 200,000 cells, while the UK SMD trial awaits the safety review by the independent data safety and monitoring board for the first subjects treated with 200,000 cells.
The company still plans to initiate its Phase II trial in the fourth quarter of this year, but if you extrapolate the slow progression of the trials to-date, meeting that timeline will be a challenge.
Overall, the clinical update didn't offer shareholders much encouragement. The company's continued focus on resolving legacy issues could be a culprit, in addition to the cautionary approach to safety.
Regarding one of the most important items for shareholders, the company had no update on the interim trial data publication. The only statement that provided any guidance was; "We want to get the Phase I interim data out there as soon as we are successful in landing a publication." However, the company has since clarified that the status hasn't changed since its presentation at the World Stem & Regenerative Medicine Congress last month, which included a slide which stated "Manuscript detailing interim data under review at impactful journal - Co-authored by participating surgeons and the company."
On Thursday, June 5th, Stem Cell Reports published an impressive study by ACTC in collaboration with the University of Connecticut, using hESC-derived Mesenchymal stem cells (or MSCs) for the treatment of multiple sclerosis-like disease in mice. The company believes the study further validates that ACTC's hESC MSCs may be superior to MSCs made from cord blood or adult sources, such as marrow or adipose tissue.
ACTC's stated strategy is to advance the MSC program through proof-of-concept, and then partner the program with a company that has expertise in clinical development outside of ophthalmology. Given ACTC's limited resources and its desire to become an ophthalmology-focused biotech company, this appears to be a reasonable strategy.
Legacy Issues Resolved
One of the main reasons for the call was to discuss the recent litigation settlement. ACTC agreed to pay out 384 million shares in a settlement agreement with former warrant holders, due to ACTC's failure over the years to honor the anti-dilution provisions in the original agreement. The shares amounted to a settlement (which includes attorney costs) of approximately $23 million, based on the share price at the time of the settlement.
In addition to the litigation settlement, the company recently paid off a convertible debenture that was outstanding from a prior settlement. With these two actions, the company has finally resolved its outstanding legacy issues, which were consuming considerable energy and resources. However, as a result, the company has further depleted its cash reserves and available authorized shares, which are both critically low.
An additional consequence of the settlement is that close to 400 million shares are now in the hands of individuals who have been in an adversarial relationship with the company for many years. It is possible those shares will be dumped on the market over a short time frame. This will, of course, further drive down the stock price, which exacerbates the impact of a dilutive capital raise.
Additional information was obtained from the brief Q&A session at the end of the prepared remarks. The most relevant question is provided below:
John Redaelli: Thank you for taking my call Ted. I have a few questions if you don't mind. Is there a connection with Pfizer, Roslin and ACT's RPE cells? Has any thought been given to a future rights offering for existing ACT shareholders? Are multiple blebs being used now or contemplated for future use during clinical trials?
Ted Myles: Ok, so… I'll answer in reverse order, the multiple blebs are not currently being used and looking to Eddy here, I don't think we plan on using them in the future.
Eddy Anglade: No, that is not the plan. And, obviously we are in the midst of working through the kind of Phase II program that we are going to be initiating this year, but a single bleb administration is what we are planning at this time.
Ted Myles: One of your other questions was about any connection between us and the Pfizer-Roslin relationship. And no, we are not involved in that relationship. And forgive me, I forgot your other question.
John Redaelli: The rights offering for ACT share holders.
Ted Myles: No, not at this time. We are evaluating a number of financing options. I am not going to rule out a rights offering, but I don't want to make any firm commitment in that direction, either.
The most meaningful response was in relation to the Pfizer agreement with Roslin. Roslin Cells is located in Europe, and provides Good Manufacturing Practice (or GMP) manufacturing services for cellular therapies intended for clinical trials. In May, Roslin Cells announced a new cell manufacturing contract with Pfizer. ACTC also has an agreeement with Roslin, which allows Roslin to manufacture and distribute ACTC's Blastomere-derived hESCs. The speculation was that Pfizer had indirectly developed a partnering arrangement with ACTC through Roslin.
Not only did the company's response dispel the speculation, it shed light on the fact that Pfizer is moving forward with its own RPE program. As I've stated in previous articles, it has been inaccurately assumed by many shareholders that ACTC has the lock on hESC RPE technology, when in fact, there are several approved and pending RPE patents by other companies with plans to move forward with their own AMD trials, including Pfizer.
Questions were asked regarding the need to increase authorized shares, available liquidity, and the need for a capital raise, but for the most part, those questions were left unanswered. Mr. Myles' basic summary, which offered no specifics, was as follows:
We look at the 2014, the 2014 corporate objectives are at the end of the year we hope to be a NASDAQ listed company with a lot of cash in the company's coffers that can fuel, fund the company through the next group of milestones. We are abundantly aware of the September 30th deadline for the reverse split and we are working with our advisors and our lawyers to figure out the best approach to effectuate the split and line up a financing. I talk about the reverse split, the application to NASDAQ and the pursuit of institutional financing as kind of a singular event. It does not mean that they are all happening at exactly the same time but they need to be all considered together and mapped out in a plan. And the backdrop of that plan should be continued fundamental business progress like the publication of the Phase I data and initiation of Phase II, etc. So again, it's hard to pinpoint the exact timing for all these things but these are all the pieces that we are considering in maximizing the opportunity here.
My overall assessment of the conference call was that the company is still trying to distance itself from its past. I remain impressed with Ted Myles, who comes off as professional, direct, and sometimes brutally honest. He has been tasked, with guidance from the Board, to develop ACTC into a credible company that will one day attract the attention of long-term institutional investors to provide much-needed capital to progress the company's very promising technology. He continues to make meaningful progress in moving the company forward, but at the expense of existing shareholders, which is somewhat unavoidable.
The Death Of A Cult Stock
By most all definitions, ACTC could be described as a typical cult stock. The company's enthusiastic shareholders can actively participate in no less than three internet sites; one pay site, one free public Google site, and one "all-girls" private Google site, in addition to the typical Yahoo message board, devoted specifically to discussing ACTC.
In addition to the internet sites, the prior CEO, the late Bill Caldwell, who was involved in orchestrating the security fraud, was fond of stating investors were getting the stock for the price of an option. Of course, that is incorrect. A low stock price does not mean cheap. It just means there are a lot of shares outstanding. The overall market cap has to be considered when evaluating the value of an investment. It's an obvious statement, but many small retail investors viewed the stock as being cheap simply due to the fact they could get it for pennies a share.
The price of the stock also leads to a lottery mentality. For small retail investors, it "feels" good to have a large number of shares. This can be detrimental, because penny stock investors have a tendency to both over-extend and go all in, which is contrary to the basic investment principal of diversification.
Considering the characteristics of ACTC as a cult stock is relevant when analyzing ACTC as an investment, particularly at this juncture in the evolution of the company. New management no longer caters to the cult stock mentality. By the end of the year, if all goes as planned, ACTC will no longer be a "cheap" penny stock. Many of the old cult stock shareholders are finally realizing after years of painful losses that ACTC is just another struggling biotech with very promising science but a long, long road to commercialization. The conference call was further evidence that ACTC's cult stock days are numbered. RIP.
Advanced Cell Technology is a company in transition in many ways. On the positive side, the science continues to be compelling. ACTC is a clear leader in the field of regenerative medicine as it relates to using hESCs for treatment of ocular diseases. Second, the company has finally worked through legacy issues that have consumed valuable resources. Third, the company is now being run by professional managers and a very strong Board of Directors.
However, the road ahead will be very challenging. The company has to manage the difficult task of orchestrating a capital raise, a reverse stock split, up-listing and an increase in authorized shares without completely destroying shareholder value. There are cracks in the very loyal shareholder base, who have seen their investment continue to deteriorate with more pain to come.
Ironically, I have started to very slowly accumulate a position, because it is my nature to run against the herd. If Ted Myles and company can successfully navigate the obstacles ahead, ACTC will come out the other end with a renewed life and great potential. But I acknowledge, it's a big "IF".
Disclosure: The author is long ACTC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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