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Summary

  • ACT's new management is taking right steps to rebuild shareholder value and trust, but success is far from assured.
  • A broad method for quantifying share price in the event of a successful transition to Phase II is discussed.
  • The actual inputs to these calculations will depend almost entirely on the details presented in the publication of the company's Phase I results.
  • ACT has just scheduled a conference call for Monday in order to provide a "corporate update".

Update: After this article was submitted, Advanced Cell Technology (OTCQB:ACTC) scheduled a conference call for Monday, August 11, 2014 at 5:00 p.m. This call could discuss DSMB (FDA Data Safety Monitoring Board) approval, publication of Phase I results, or something else. Investors will certainly want to consider any information presented within the context discussed below.

I'm going to begin this article by issuing the disclaimer that shares of Advanced Cell Technology could easily be worthless in a year or two. Previous management has been an undeniably poor custodian of shareholder value, and it remains to be seen whether or not the company can overcome that legacy. My last ACTC article predicted a series of 7 steps that new management needs to take in order to restore the company's finances and the trust of its investors who shade to the more cynical side, like me. So far, so good: step 2 & step 3 have been successfully completed now, and steps 4 and 1 are apparently just waiting on publishing & FDA bureaucracy. In the meantime, some less cynical ACTC investors have thrown out a wide range of projections for the stock, should the steps that I outlined be successfully completed; one went so far as to set an $8 price target. This article will discuss my own calculations on that topic, detailing a method for arriving at a reasonable valuation for ACTC shares should the company manage to be successful in its plans for Phase II clinical trials.

In most situations where a company has little or no income and an unproven business model, the best means of valuing shares is to base the valuation off the expected TAM (total addressable market) of the product. Many other development-stage pharmaceutical stocks are valued this way, and the pricing for those in Phase II centers roughly around one fifth of the TAM for their products. Advanced Cell Technology has estimated the worldwide TAM for macular degeneration at $25-30 billion. I think these #s overstate the actual addressable portion of the market, but for the sake of argument, I'll use the bottom of that range, which leads to the following calculation for ACTC shares in Phase II:

TAM / 5/ shares outstanding= ACTC price
$5b3.3b$1.51

Any larger Pharma company that might wish to purchase or partner with ACT would make calculations vaguely along these lines. The terms of any deal would depend almost entirely on the details of the publication of data from the Phase I trial, which is already under journal review. As discussed in my first article, earlier work by the company is unlikely to have much impact on such a deal.

While 20 times one's investment is a fabulous return by any reckoning, these calculations represent the maximum theoretical value that I might hope to get from ACTC shares in the next year or two. The reality is a good lesson to the uninitiated on why dilution matters. The difficulty in realizing such a gain, even if ACT's initial treatments show consistently phenomenal results, is that the company owns only a small fraction (if any) of its shares. Reliable current float information is unavailable, but it hardly matters. My prior articles documented that all outstanding shares were floating on the open market, and even if the company has not sold the newly registered shares to Lincoln Park Capital, they represent only ~15% of all shares.

What this means is that, unless some majority shareholder(s) could be found, no reasonable company is going to attempt to buy ACT outright because they would have to do so on the open market, and that effort would face constantly diminishing return on investment. The only remaining option is to cut a deal whereby ACT gives the rights to all or a portion of its future sales in return for capital and other help in bringing its stem cell treatment to market. So for example, if that wound up being 50/50, we would only expect ACTC shares to be worth about 75 cents each.

Finally, it should be noted that management's plans (and the last step of my list) to up-list to Nasdaq have no effect at all on these calculations. Such a move could make new demand available by opening the stock up to institutional investors, but these sorts would surely do the math. Thus, for the purposes of these calculations, up-listing simply means a higher price for fewer shares with an equivalent total value.

In summary, ACTC shares do have the potential to multiply one's investment, if and only if everything goes right. So far, management is taking the correct steps to rebuild the company, and I doubt that Paul Wotton would have come on board as CEO if he didn't foresee some chance of success. Investors should watch for publication of Advanced Cell's Phase I results, and weigh the data carefully. They should also ignore some of the more optimistic claims that have been made regarding the company's potential share price.

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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Source: How To Value Advanced Cell Technology As A Phase II Company