Often, factors outside of a company’s control can pound it into the ground or, alternatively, provide an unanticipated boost. When our foolish leader decided to invade Iraq in 2002, defense contractors, especially the connected among them, enjoyed new found prosperity. On the other hand, when oil prices doubled in the 2007-2008 period, the airline industry was caught off guard and took it on the chin. A recent scandal, still playing out, may well provide a needed boost to a small San Diego cell therapy company.
The scandal that I am referring is the egregious corporate behavior that has put the health of as many as 300,000 women at risk and has created much anxiety among them. In 2010, French breast implant maker Poly Implant Prothese (PIP) declared bankruptcy after it was revealed that it had used unapproved industrial-grade silicone in some of its products, including breast implants. Recently, countries around the world have been reacting to the scandal with disparate recommendations. France, for example, was most aggressive in advising the 30,000 women in the country with the PIP implants to remove them while Britain insisted there isn’t enough evidence to suggest they should be taken out in all cases.
A company that stands to benefit from the confusion and fear is a regenerative cell company with a better mousetrap, Cytori Therapeutics (NASDAQ:CYTX). One of the therapies in its platform of regenerative medicine is soft tissue reconstruction and filling. More specifically, as it pertains to this particular situation, stem cell enhanced breast reconstruction and cosmetic breast augmentation. The cutting edge procedure involves three main steps:
- The liposuction of the patient’s fat (also known as adipose) from the stomach or hips or other part of the body where the patient desires to slim down.
- Half of this fat is set aside and the other half is put through Cytori’s patent protected technology, the recently EU approved Celution One. This machine extracts a clinical grade mixture of adipose derived regenerative cells (ADRCs).
- The patient’s own ADRCs are mixed back into the unused half of the patient’s fat and reinserted into the breast for either reconstruction or augmentation.
The entire procedure itself takes a just a few hours and the result is a natural breast without any undesirable, foreign man made material. The ADRCs are the key to the long term success of the procedure. Without the ADRC enhancement much of the fat would dissolve back into the body. However, the ADRCs create a blood supply that nourishes the fat and sustains its viability.
It is easy to see the advantages of this procedure from the patient’s perspective. An all natural procedure is certainly more desirable than saline or silicone breast implants, regardless of the PIP scandal. Once the hysteria of the recent scandal is added to the mix, one can see how this is a golden opportunity for Cytori. Cytori has a corporate website called cellenrich.eu that explains this procedure, among other cell enhanced cosmetic procedures, to the European market. Cytori lists 33 doctors in 15 countries who are already offering the cell enhanced augmentation. Cytori uses the razor/razor blade revenue model and generates sales by selling its equipment and the related disposables for each procedure.
Although this procedure has yet to be approved by the FDA in the U.S., the potential demand here for a natural alternative to breast augmentation and reconstruction should be tremendous simply because it is a much better alternative. Recently, well known actress, author and alternative medicine advocate, Suzanne Somers appeared on national television to explain her life changing experience and her excitement over the procedure. She has produced her own video explaining her road to cell enhanced breast reconstruction after undergoing a breast cancer lumpectomy. Although this particular procedure was done manually by a Hollywood plastic surgeon that did not use Cytori’s automated technology, Cytori has been granted a broad patent that should earn it gate keeper status on all such procedures in the U.S. Specifically, on February 11, 2011 Cytori was issued US Patent No. 7,887,795 that pertains to “all grafts that contain an additive and have been enriched with ADRCs, processed either by an enzyme or through mechanical force and concentrated by means of density, filtration or centrifugation”, according to the related press release. Of course, patent law is complex and subject to litigation so investors need to make their own assessment on the extent of which the benefits of this patent can be protected by Cytori.
As always, there are issues that need to be overcome for a company attempting to develop a ground breaking therapy. One is the development of a smaller, less expensive machine then its multi-use hospital grade CelutionOne that would be marketed specifically for the cosmetic market. Others issues include medical reimbursement in the EU and FDA approval in the U.S. The company has had great results in its Restore clinical trial for breast reconstruction and is currently working (some would say sparring) with the FDA to bring this and other therapies to what is sure to be a receptive USA market.
Although this article has focused specifically on ADRC enhanced breast reconstruction and augmentation, Cytori is attempting to develop a regenerative cell platform that will treat multiple diseases and afflictions. The biggest single market potential is heart disease where early clinical trials have shown very exciting results. Furthermore, an EU approval for the first ADRC based treatment of no-option chronic myocardial ischemia may be announced shortly and should bring much attention to the value of Cytori’s platform (from Cytori's November 2011 letter to shareholders):
In the second quarter of 2011 we submitted an application to expand our CE MARK to include treatment of no-option chronic myocardial ischemia (CMI). Cytori is engaged in an active dialogue with our European regulatory body. Based on feedback from regulatory officials, there appear to be no meaningful barriers to approval. CE Mark cardiac claims would allow Cytori to expand clinical use and market access initiatives for Celution® in CMI no-option patients in Europe and the other countries that recognize the CE Mark.
2011 was a difficult year for Cytori shareholders as lack of execution and delays pounded CYTX shares. Cytori senior management failed to deliver on its stated goals and, as a result, will receive no stock restricted awards for 2011. At the end of the day though, the company has a patent protected cutting edge technology that has shown its efficacy in thousands of patients and still seems positioned to make a huge impact on the global health care system and the lives of millions. The question, and increasingly it sounds like a broken record to Cytori shareholders, is when will management execute the business plan and unlock the value of its ADRC platform. With its share price decline in value in 2011, Cytori currently has a market cap of only $129 million.
These are the personal views of Wall Street Titan and investors are encouraged to do their own due diligence.
Disclosure: I am long CYTX.