On August 8th, Cytori Therapeutics (NASDAQ:CYTX) released its quarterly earnings report and shared its progress for the 2nd quarter. For those unfamiliar with Cytori, it is the leading company focused on developing a therapeutic platform that harnesses the power of the body's adipose derived regenerative cells (ADRCs) to treat and cure a multitude of human afflictions using a razor/razor blade model. Since its inception, Cytori has invested over $200,000,000 in developing, protecting and moving forward this autologous approach to stem cell technology.
Some of the highlights of the quarterly results (from the second quarter shareholder letter) were as follows:
1) The company shared news on its two important cardiac trials:
ATHENA - U.S. No-Option Chronic Myocardial Ischemia Clinical Trial
Dr. Tim Henry (co-principal investigator) at The Minneapolis Heart Institute Foundation is actively screening patients for the ATHENA trial. Dr. Emerson Perin (co-principal investigator) and Dr. James T. Willerson (local principal investigator) at Texas Heart Institute are scheduled to begin screening patients later this month. The FDA recently approved Cytori to expand the trial from five to six sites. We anticipate that all sites should be actively enrolling patients by our next quarterly update. Full enrollment of the trial remains on schedule to be complete by mid-2013.
ADVANCE - European Pivotal Heart Attack Trial
The ADVANCE clinical trial protocol has been amended and we have submitted for country and hospital approvals under the revised trial design in several target countries. While the primary endpoint and principle investigators remain the same, the amended design reconciles varying diverse cell therapy regulatory guidelines within a G5 country focus, incorporates additional clinical outcomes to support reimbursement, modifies inclusion and exclusion criteria to accelerate enrollment, and incorporates a single treatment dose. Enrollment is expected to resume in the fourth quarter of this year and is anticipated to enroll up to 216 patients in up to 35 hospitals in the G5, Canada, The Netherlands, and Poland.
2) Cytori provided an update a very important potential near term revenue catalyst:
European CE Mark and Expanded Indications-for-Use
We continued in an active dialogue and document exchange with our governing regulatory authority during the second quarter regarding our application to add claims for no-option chronic myocardial ischemia patients to our existing Celution® System CE Mark indications. We are currently preparing additional information recently requested by the clinical reviewer. This documentation will be submitted in the third quarter.
3) Cytori obtained approval to expand its CE Mark indications-for use for four new therapies:
General Surgery Procedures to facilitate healing in patients with:
- Cryptoglandular fistula
- Deficiency or injury of: skin, fat, muscle and fascia
- Soft tissue wounds, ulcers or fistula associated with trauma, diabetes, ischemia or radiation injury
- Tissue ischemia
However, while the progress reported above is important to the company's long term future and a CE Mark approval to add claims for no-option chronic myocardial ischemia patients would be a very big deal in the short term, this progress is secondary to the number one question on shareholders' minds: When will long promised partnership(s) come to fruition?
While Cytori has achieved partnerships in the past. Even in aggregate, so far, they pale in comparison to $2,000,000,000 mother of all stem cell partnerships achieved by Australian stem cell company, Mesoblast (OTCPK:MEOBF), in 2010 in a deal with Cephalon. There has been no indication from the company on what the size of any deal might look like but Cytori has indicated in the past, its desire to not rush into any partnership in the belief that as it adds to its cumulative clinical data and peer reviewed portfolio of medical literature, its negotiating position increases. Any substantive Cytori partnership, in addition to the positive effect on the financial condition issues discussed later in this article, would represent a new independent, arm's length evaluation of the company's value. Looking ahead, the size, terms and therapy(ies) entailed by any agreement(s) would likely be extrapolated by investors and analysts as the basis for a valuation that is more representative of Cytori's entire ADRC therapeutic platform than the current depressed valuation. The medical community's enthusiasm for the potential of Cytori's ADRC platform can be gauged by a simple search on clinical trials.gov. There are a total of 68 listed studies using ADRCs for a wide variety of afflictions, including Parkinson's disease, diabetes, multiple sclerosis and kidney disease.
Before discussing the current status of potential Cytori partnerships, it helps to take a step back to the first quarter conference call, held on May 9, 2012, to gain some perspective on the situation. Here are some selected quotes from Cytori CEO, Chris Calhoun, on this topic:
We are actively negotiating strategic partnerships to develop and commercialize Celution cell therapy in specific indications in markets. While a number of these are progressing, management is particularly focused on closing one or two of the most advanced opportunities which we believe can be completed in the near term.
Let me start by saying we, and by we I mean collectively the board and management, realize the importance of completing one of these asset partnerships as soon as possible. As I noted earlier, there's more activity and interest and real tangible field processes going on than we've ever seen before. While we have many more discussions that are going on, there are really seven distinct deal processes that underway currently. To provide some color on that - and I can't go into too much detail but I think I can give you more color - these include approximately three large pharma companies, a medical device company, two government groups and at least one philanthropic organization.
I think we've got a lot of different opportunities that we're pushing along here that for the most part don't overlap - a little bit they do - but for the most part, they really don't. The ideal partnership at this stage for us comes within three fronts. One front is core or things that are on the market, and that's kind of more of a commercialization partnership and that would be around some of the approved products, approved technologies, soft-tissue type applications in Europe and America, and that is more to help stimulate market access and drive the commercial platform. The second is for kind of deep in the pipeline core applications and this is probably vascular, cardiovascular, wound - those kinds of things where we have good clinical data, even some completed trials, now moving into later stage trials, and this would be more of a kind of late stage development and then commercialization type trial, and that would be upfront money and some milestones, and then a commercialization structure. The third possible partnership is kind of around the stuff that's earlier, and the platform - we've only been able to focus on a few things because each one of these tales a significant amount of resources and you really just can't do everything. We've kind of selected a couple of things that we thought were the right things to go after, and we've been focusing on those, but this technology as a platform can really apply to a lot of things.
Based on these comments, many investors expected a partnership announcement within the second quarter. The lack of a deal has caused the shares to suffer as a result. An important issue to note with regard to the need of capital from a deep pocketed partner is that the company has a credit facility outstanding in the amount of $25,0000,000, due over the next few years, and currently has $25,700,000 cash on hand. So it is no secret that dealing with balance sheet liquidity is a top priority.
The company's second quarter shareholder letter, released in conjunction with last week's earning report, followed up on the prior quarter's partnership optimism and explained why no partnership had consummated:
At the time of our last call, we disclosed that we were in multiple advanced partnering processes with two at a stage we described as 'very near term' to closure. Subsequently, both of these deals experienced delays that required additional time and effort by our team. Importantly, as of today we believe we have overcome the additional hurdles and that we are close to completion of both transactions. We remain highly confident on this important matter.
On the conference call last week, it was disclosed that one of the potential partners experienced a "surprise internal management change" that stalled negotiations. Chris Calhoun also projected that the company was $20-$30 million dollars in funding from breakeven and was within "striking distance" of removing the balance sheet as a barrier. He indicated that one of the "other" partnership opportunities in particular, out of a half a dozen, was "moving rapidly towards completion". Interestingly, Calhoun made a not so subtle prediction about the stock price movement he expected as a result of a potential deal completion, noting that 11 million shares covered by warrants and options expire within the next 2 years and that the company had the potential to raise up to $40,000,000 from these exercises. However, at the current stock price of $2.66, the strike prices of most of these derivatives are barely in or well out of the money, with strike prices ranging from $2.59 to $5.73. It doesn't take a genius to figure out that a sustained upward valuation adjustment would be necessary for this "plan" to come to fruition. Unbridled optimism? ...or simply knowledge based confidence as a result of the nature of the actual negotiations occurring behind closed doors? That's up to the individual investor to decide and it must be weighed against the failed execution of past projections.
For real world examples of what a substantive partnership might mean to Cytori, take a look at the stock action of Athersys in December 2009 ($1 to $6 per share within a few days on a Pfizer partnership) or Mesoblast in December 2010 (from around $3 to over $10 and a market cap over $2 billion within a few months on the Cephalon partnership).
So there you have it. A company at the forefront of a revolutionary field of medicine that many believe (myself included) will be the new paradigm in health care for decades to come, a company that seems to be on the verge of being the first to obtain a CE Mark claim to treat no-option chronic myocardial ischemia patients using a regenerative therapy and a company that has stated that they have two partnerships close and a half a dozen in the works. And finally, we have here a company that, at current levels, has an enterprise value of only $133,000,000 after investing over $200,000,000 to create and protect its ADRC platform.
Cytori Therapeutics has had many starts and stops in its rollercoaster ride to get to this point and has been an easy target of short sellers with its well documented difficulty in executing as planned. Investors need to do their own due diligence and make their own assessment as to where this roller coaster ride is headed next. I'm expecting (hoping?) to be leaning back in my seat, looking up, for the next several months and longer, with the expectation that the company can finally come through on its promise. The potential here is huge but Cytori must get over the hump and one or more substantive partnership agreements should do it. For Cytori shareholders, the waiting is the hardest part.
These are the personal views of Wall Street Titan. All investors should do their own due diligence. Other competing publicly trade stem cell companies in the sector are Osiris Therapeutics (NASDAQ:OSIR), Athersys Inc. (NASDAQ:ATHX), Stem Cells Inc. (NASDAQ:STEM), Pluristem Therapeutics, Inc. (NASDAQ:PSTI) and Aastrom Biosciences, Inc. (NASDAQ:ASTM) and Baxter International, (NYSE:BAX).
Additional disclosure: Also long CYTXW warrants.