Cytori Is A Compelling Short Sale Opportunity

 |  About: Cytori Therapeutics Inc (CYTX), Includes: GSK, MNKD, ONTY
by: Martin Shkreli

The book value of Cytori (NASDAQ:CYTX) common stock is $0.18 per share as of Q4 2011, and I project it will be close to zero at the end of Q1 2012.

Unfortunately for Cytori shareholders, book value approximates what I believe is fair value of the equity. What should one pay for a business that, on average, loses 7 million every quarter for the last 4 years on 2 million in revenue? I don't believe Cytori is a pipeline "story", so I would submit that these shares are worthless. And yes, we are short the stock.

Cytori likes to think they're a leader in regenerative medicine. I have a few issues with this.

First, regenerative medicine is a meaningless and embarrassing buzzword that means nothing. Medicine is medicine, and the goal of any therapy is to increase the patient's well-being while limiting adverse events. Using cells as a therapy is not a new idea, so using the word "regenerative" is both redundant and unnecessary. Actual leaders in the cell therapy field, like Baxter or Grifols, trade at pedestrian valuations, and while they are exploring exciting new treatments in diverse areas, there are muted expectations due to the limited (so far) applicability of cell replacement technology in most diseases. My second issue with Cytori is their focus on cardiovascular stem cell therapies is particularly limiting when one's goal is to be a leader. The Baxter IVIG Alzheimer's trial is the most anticipated stem cell, or "regenerative medicine" study. There are limited expectations for cardiovascular disease and Mesoblast and Baxter are far ahead of Cytori. It's hard to lead when you're so far behind.

Autologous adipose (fat) cell therapy is Cytori's strategy. The concept is simple: fat contains stem cells. Take the fat from a patient and centrifuge and filter to the point where it is pure in stem cells. Take this solution and administer it to the site of action where the patient might need stem cells. This all sort of makes sense, but there are a number of fatal flaws. The first is there no evidence to suggest it works. Despite some diehard faith from Cytori investors and seemingly, management, there is limited clinical proof of concept for Cytori's approach. This is why revenue has been flat for 4 years with no hope of growth (including company guidance). The world is generally skeptical that something as complex as a myocardial infarction can be changed by an autologous transplant. Indeed, it is clear that these autologous therapies don't work by differentiation, but instead by a paracrine nature. The company is finally doing some slightly larger double-blind studies, so perhaps we will see something definitive at some point. However, I am skeptical - I will analyze the trials in detail shortly. My sense is the company would be better off pursuing a Baxter-like "RENEW" study, where that company is studying 450 patients to see a definitive result. Cytori tends to beat around the bush and forget that medicine requires hard evidence before widespread use begins. All of the off-label salepeople in the world won't help Cytori. If they did a real, large study with definitive results, the stock would either +1000% or -50%. It appears Cytori is more content generating meager sales, substantial losses and rapidly rising share count. I believe management had a plan of benefitting from being associated with this growing field, and it backfired.

The Cytori "ATHENA" study is their first US study, and will enroll a meager n=45 patients. Perhaps they are hoping to replicate the miraculous and "too good to be true" Mesoblast results. They certainly took great care to use the same investigator. The MACE at 12 month primary endpoint will lead to a lack of definitive data for at least a year. The study hasn't even started enrolling, so maybe we'll see data in late 2013 or early 2014. They'll be well out of money by then, and there is only a very small chance that with n=45 sample size the company will hit a home run. The Baxter and Mesoblast large Phase IIIs will be done by then!

"ADVANCE" is a bit of a real study with n=360. Unfortunately, I suspect it will take all of 2012 to enroll this study, and probably some of 2013. Reduction in infarct size at 6 months is the primary endpoint, and I bet this is a meaningless endpoint. Something like MACE or mortality and hospitalization would be a more suitable endpoint given this patient population. Again, Baxter and Mesoblast are "going for the gold" with real clinical outcomes endpoints. Infarct size is not exactly a real goal in the world of cardiovascular medicine, where you are trying to keep the patient alive.

As mentioned in the beginning of the article, Cytori is in poor financial condition. In just another quarter, June 30th, I project Cytori will have an "upside down" balance sheet with negative shareholder equity. For a company that lacks any coming definitive data or any projection of increasing sales, I am surprised to see the value of the company where it is. I bet the stock will get cut in half in the next 6 or 12 months. It's a worthy short.

With that said, let's quickly recap all of the picks I've put on Seeking Alpha. Please note I do not put borrow costs for my shorts as they generally will not greatly influence my returns. Even if the average APR for a borrow is 50%, I generally do not stay in shorts for a year or pay 50% interest. With all of this said, I am closing my recommendations to short Oncothyreon (NASDAQ:ONTY), MannKind (NASDAQ:MNKD) and Human Genome (HGSI). Please understand I still think these stocks will go down, but I have high IRR hurdles and the risk/reward at these levels is worth moving on from. I believe longs are making terrible mistakes holding these shares.

With 10/11 correct stock picks, I hope I have been useful to you "home gamers". The average and median return of my stock ideas has been 32% and 38%. The time-weighted IRR return has averaged 240% with a median of 87%. If you don't carefully think about how time impacts your returns on investment, you are missing the whole point of growing your funds (investing, trading, whatever you call it). A 10% return in a stock in one month is usually much better than a double in one year (ceteris paribus).

Name Entry Price Exit Price Days Return IRR Comment
Neoprobe (NEOP) 6/1/11 5.25 8/5/11 2.00 65 62% 1401% I will never make this much return this quickly again.
Oncothyreon 7/25/11 10.00 3/19/12 4.97 238 51% 87% I expected more out of this but c'est la vie.
Avanir (NASDAQ:AVNR) 5/31/11 4.62 11/25/11 2.00 178 57% 152% Good trade.
Mesoblast (MSB AU) 8/18/11 7.95 Ongoing 7.31 214 8% 14% The best short in the world, period.
Biomarin (NASDAQ:BMRN) 6/8/11 27.12 Ongoing 34.67 285 28% 37% Best run orphan drug company in the world (after Retrophin).
Chelsea (NASDAQ:CHTP) 7/29/11 5.08 Ongoing 3.51 234 -31% -44% My sole mistake. Hope to be vindicated with approval.
Zalicus (ZLCS) 7/6/11 2.60 11/9/11 1.16 126 55% 256% Easy money.
Human Genome 8/28/11 12.63 3/19/12 7.89 204 38% 77% Done with this one (for now?).
Star Scientific (CIGX) 6/5/11 5.26 Ongoing 3.80 288 28% 36% Always a question of how big a position to be short.
Ampio (NYSEMKT:AMPE) 1/6/12 4.51 Ongoing 2.68 73 41% 449% So far, so, so good.
MannKind 1/19/12 2.84 3/19/12 2.33 60 18% 173% Works for me.
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Disclosure: I am short CYTX.

Additional disclosure: I may alter my position in any way.