Cytori Therapeutics: The 'Celution' for Commercial Success

 |  About: Cytori Therapeutics Inc (CYTX)
by: Mike Havrilla

Cytori Therapeutics (NASDAQ:CYTX) is a leading global innovator in the emerging field of regenerative medicine using adipose (fat) tissue as a source for adult stem cells capable of differentiating into a variety of cell types. Research has shown that fat tissue is a rich source for a variety of regenerative and adult stem cells, despite the widespread use of bone marrow and other sources by many stem cell companies. The Company is developing therapeutic applications for its Celution System to enable real-time regenerative cell therapy in conjunction with reconstructive surgery, cardiovascular disease, and other unmet medical needs. The Company is also engaged in commercializing its Celution-based StemSource Cell Bank in Japan to hospitals and clinics to enable regenerative cell banking, which allows for the early collection and storage of adipose stem cells when they are believed to have enhanced therapeutic potential before the onset of advanced aging. Cytori expects to price its stem cell therapies well below those of competitors, which may cost anywhere from $10,000 – $100,000 per patient, by leveraging its real-time, adipose tissue processing capabilities to produce regenerative cell therapies.

The Company's cell separation technology standardizes and automates a process that releases regenerative cells residing naturally within adipose tissue. The adipose tissue is taken from the patient using a minor liposuction-like procedure, placed into the system and, with the touch of a button, the processing begins. About an hour later, following a tissue wash, cell processing and concentration, a prescribed dose of regenerative cells may be delivered back to the patient. This system is designed to fit seamlessly into the existing workflow of hospitals. The Company has formed a Joint Venture with Olympus Corporation, a leading medical device and optics company in Japan, to develop and manufacture the commercial version of the Celution System. Cytori is solely responsible for commercializing the systems to physicians and hospitals or for identifying partners to distribute these systems for specific therapeutic applications. Benefits of this partnership with Olympus include a long history of quality engineering & manufacturing expertise, a global service infrastructure, and a total of $45 million in funding to date.

Cytori has several pending catalysts expected before the end of this year. Six month data studying Cytori's regenerative cell therapy in the RESTORE I clinical trial in Japan for breast reconstruction after partial mastectomy in 11 patients has been peer-reviewed and accepted for presentation at the San Antonio Breast Cancer Symposium in mid-December. Two other breast reconstruction studies are pending approval, including the RESTORE II trial in Europe as a post-market study in 70 patients after partial mastectomy and the VENUS trial with 20 patients for a radiation damage breast reconstruction trial in Italy. A key advantage of Cytori's proprietary regenerative cell therapy for reconstructive surgery is a 250% increase in tissue retention that has been demonstrated using the Company's proprietary Celution System output as compared to using unprocessed fat tissue as a cosmetic filler. The Company is focused on partial breast reconstruction as an unmet medical need as opposed to patients with full breast removal, who are eligible to receive full implants.

Beyond these clinical trials, the Company expects to receive European approval by the end of this year for its second generation Celution System, for which it has retained all marketing rights to therapeutic applications for the regenerative cell output. An early 2008 commercial launch is anticipated for Cytori's regenerative cell therapy for breast reconstruction with a 2009 ramp-up planned based on RESTORE II clinical trial results, which will be crucial to reimbursement and more widespread use in a market that includes 3 million existing patients and 300,000 new patients per year.

The Company is partnered with Green Hospital Supply in Japan and expects an early 2008 StemSource Cell Bank commercial launch with a goal of establishing 250 banks by 2011. This agreement is for 50:50 revenue-sharing and includes revenues for both the initial cell bank installation and the recurring sales of per-patient disposable sets with a total market potential exceeding $1 billion in Japan. Because the health of adult stem cells decline over time due to illness and the aging process, it is beneficial to harvest and store these regenerative cells as early as possible in order to benefit from future advances in therapeutic applications. Regenerative adult stem cell banking represents an important form of a "savings account" with assets that can be utilized in the future in order to treat or cure disease or other common conditions typically associated with the aging process. As the science of regenerative medicine continues to advance, new therapeutic applications will arise for adult stem cells, making the storage of these cells valuable to ensure future health and well-being.

In the area of cardiovascular disease, the Company's APOLLO heart attack safety and feasibility European trial with real-time cell processing is pending approval. Also, the PRECISE chronic ischemia trial is currently in progress with 36 patients and results are anticipated by late 2008. Cytori has achieved preclinical validation for its regenerative cell therapy which has shown improvement in pig models of chronic ischemia and acute heart attacks, including increased heart wall thickness & efficiency and a decreased area of tissue damage.

Cytori has successfully raised $82 million since its 2005 Nasdaq initial public offering, with approximately two-thirds of this capital from non-dilutive strategic partners such as Olympus Corporation. I have estimated that $80 million in additional capital will be required to reach sustained profitability by late 2010 – early 2011. The Company expects to clarify profitability timelines and forecasts by early 2009, but I expect strategic partnerships and non-dilutive investments to account for at least 65% of the $80 million required, with the remainder coming from equity offerings. The Company's typical cash burn rate of $2 million per month is expected to increase slightly in the near-term due to increased marketing costs for commercialization of Celution in 2008 and expanded clinical trials. However, R&D and SG&A expenses should be largely offset by increased partnership revenues and cost-sharing agreements.

Cytori is expected to meet with the FDA by the end of the year to clarify the pathway for regulatory approval and expects to pursue a 501(k) PMA medical device route. Cytori has in-house, interim manufacturing capability until joint-venture partner Olympus Corporation goes on-line in 2009 for full-scale production of the Celution System and associated disposable sets. Cytori's interim manufacturing capacity allows it to produce 50 – 100 disposable sets and one to two Celution Systems per week in support of clinical trials, commercial launch of cell banking in Japan, and breast reconstruction in Europe. I expect Cytori to achieve a market cap of at least $1 – $1.5 billion or about 7X – 10X its current market valuation by the time it reaches sustained profitability in 2010 – 2011. This market cap equates to about 3X – 5X my sales estimate at that time, as the Company achieves increased market share in Europe and Japan; and begins to enter the US market for stem cell therapies, which is estimated by industry sources to be $700 million during 2010 and over $1 billion in 2011. While stem cell companies such as Geron (NASDAQ:GERN) ($552 million market cap) and Osiris Therapeutics (NASDAQ:OSIR) ($391 million market cap) have attracted more attention from the media and investors; Cytori has quietly worked its way toward commercial applications by early 2008 for its adipose-derived regenerative cell therapies and cell banking services.

Disclosure: Author has a long position in CYTX