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We’ve all seen it. A biotech gets FDA approval and its shares skyrocket 100%, or more, in a single day. All too often we’ve seen the other side of the coin too, where the FDA puts up a road block and a company loses 70% of its value overnight. However, there is one FDA approval related story that is a bit more unusual and involves a company with a medical technology that could represent a new paradigm in regenerative medicine.

Has anyone ever heard of a situation where a company tied the issuance of senior management restricted stock awards to the procurement of an FDA approval? Well, Cytori Therapeutics (NASDAQ:CYTX) did just that when it issued an 8-K on 2/28/2011. In this filing it tied the vesting of restricted stock awards to three conditions:

Pursuant to the terms of the award agreements, the performance-based restricted stock awards will not vest until January 1, 2013, and then only if, and to the extent that, the Company’s achieves certain performance goals established by the Compensation Committee to be achieved by January 1, 2012. The performance goals are weighted based on the following achievements: obtaining certain FDA clearance or approval (40%), achieving a targeted revenue increase for the fiscal year ended December 31, 2011 (20%), and entering into a major collaboration for development and/or commercialization of the Company’s products (40%). To the extent that any of the performance goals are partially achieved, the Compensation Committee maintains the discretion to continue the vesting of all or a portion of the awards following January 1, 2012.

To put this 8-K release into perspective we have to turn the clock back to March 12, 2010. On this day, Cytori shares suffered a precipitous drop as the company revealed the following in a shareholder letter:

The FDA provided a response on our regulatory path, for which they have requested a Pre‐Market Approval application for ‘soft tissue filling’ claims. We have requested a pre‐IDE meeting with the Agency to determine the exact scale, scope, design, timing and any other requirements of a U.S. study and to discuss the specific marketing claims. We intend to utilize data from our multi‐center European RESTORE 2 trial to address safety and feasibility, and anticipate a U.S. pivotal / approval study.

Cytori and investors had been hopeful for a speedier medical device 510k approval for soft tissue filling claims and this response from the FDA signified a disappointment. The FDA had a different interpretation of the rules and decided to require a longer path to approval that would include a clinical trial. Cytori’s soft tissue filling claim involves the extraction of a patient’s fat through liposuction. A portion of the fat is processed through its flagship product, called the Celution, which extracts a purified mixture of adipose derived regenerative cells (ADRCs).

These cells, not cultured or manipulated in any way and without the moral baggage associated with embryonic derived cells, are quickly recombined with the patient’s unprocessed fat. The resulting cell enriched fat graft can be used for breast reconstruction, augmentation and other soft tissue filling applications and will hold up in the body to a much greater degree than a fat graft that is not enriched. Clinical trials in Europe have shown excellent results for this procedure and Cytori was recently issued a broad patent that granted it the sole rights to all automated cell enhanced fat grafts.

Fast forward one year to Cytori’s conference call held on March 10, 2011. Up until this call, the company had provided few details related to the ongoing progress with the FDA approval process and the stock languished as a result. During this call, analysts were surprised to hear that Cytori management had come to a rather surprising conclusion and had implemented an aggressive new strategy related to its FDA soft filling claim application.

Cytori had determined that the FDA WAS WRONG in requiring a Pre-Marketing Approval application. Cytori hired former high ranking FDA officials and expert attorneys and had conducted a comprehensive review of their application and the FDA’s response in coming to this conclusion. It then set on a new path to convince the FDA of its position, with plans to submit or resubmit several 510k applications in 2011 for what it anticipates will be a speedier approval process.

Unfortunately, it would be a futile exercise for the average retail investor or even an institutional analyst without extensive FDA experience, to try and independently evaluate whether Cytori is correct in its contention that the FDA was wrong and whether Cytori can convince the FDA of its “mistake” and obtain approval without extensive clinical trials. However, how often does a management team feel so strongly about its position that it puts a large portion of its own compensation at risk at the whims of the FDA? Answer: NOT TOO OFTEN. The phrase “follow the money” comes to mind in this situation.

Cytori Therapeutics deserves a close look in my opinion, not solely as a result of this potential short term catalyst, but for the progress it is making throughout the globe in bringing a technology that uses the body’s own healing cells to repair itself. Cytori has invested over $200,000,000 in the last decade to perfect and protect its technology platform based upon the discovery that adipose, or fat, is the richest source of adult regenerative cells in the body, by far. This heterogeneous mixture of adult stem cells has been shown to have remarkable healing powers in a multitude of human conditions. Cytori has sponsored European clinical trials for reconstructive surgery and heart disease with very positive results. Independent investigators have also shown therapeutic benefits, or are exploring the use of ADRCs, in:

Cytori also recently obtained its first FDA approval for a product called PureGraft. The PureGraft System sets a new standard for fat graft processing with its membrane-based tissue filtration combined with speed, simplicity, safety and precision. Like the Celution, PureGraft uses the razor/razor blade model of consumables for each procedure. PureGraft represents a strategic opening for Cytori into the plastic surgery field that will help it gain market access for its regenerative Celution technology in the U.S, once FDA approval has been obtained.

As of December 31, 2010, Cytori had $52.7 million in cash and a $20.9 million loan from a GE Healthcare lead group of which $6.453 was due within one year. Cytori had $10.6 million dollars in revenues in 2010.

These are my personal views. All investors should always do their own due diligence.

Disclosure: I am long CYTX.

Additional disclosure: I also own CYTXW (warrants).

Source: Cytori Therapeutics Management - Putting Its Money Where Its Mouth Is