Cytori Therapeutics (CYTX) is successfully implementing the early stages of a dual device and therapeutic commercialization strategy based on its Celution System, which transforms a patient’s own fat tissue in about one hour into a regenerative cell cocktail which can be utilized for medical procedures or stored for future use. While removing a little unwanted fat from patients is a good thing in itself, Cytori also circumvents the controversy and ethical debate over embryonic stem cell research by harnessing the regenerative cells found naturally in fat tissue. The company recorded its first product revenue during 1Q08 of $153,000 related to sales of the Celution System, in addition to receiving orders for 13 more systems and the related consumables as part of a razor/razor blade business model. During 2Q08, Cytori will recognize an additional $0.8 million from shipments already sent during the first quarter. The company ended the first quarter of the year with $8 million cash and negligible debt on the balance sheet.
At the end of April, Cytori received $6 million in additional funding as the second half of an agreement to sell 1 million shares at $6 per share to its Japan-based strategic partner Green Hospital Supply, which specializes in distribution agreements with hospitals for Cytori’s stem cell banking business. Green Hospital Supply now owns 3 million shares of Cytori, in addition to just over 3 million shares which are held by its other major strategic partner in Japan, Olympus Corporation, which provides expertise and support for the commercial-scale manufacturing of the Celution System. Cytori issued guidance for full-year product revenues of between $10 to $12 million based on initial demand from the European and Asian reconstructive surgery market, in addition to interest in its StemSource Cell Bank from hospitals in the same regions. Cytori hopes to expand upon its commercial activities following successful product launches this year, based on the results of multiple clinical trials which are evaluating the Celution System output for breast reconstruction and heart disease indications.
In mid-May, Cytori reported encouraging results from a clinical study being conducted in Japan using the company’s proprietary Celution System output of adipose-derived stem and regenerative cells for breast augmentation. Preliminary results in the first three patients demonstrated that the increased breast volume achieved in the study was retained after three months and the tissue had a natural appearance and texture. The next milestone in this study will occur in early 2009 with a nine-month follow-up, at which time volume retention and tissue softness will be measured to determine if the results persist and can be considered permanent. The study is being conducted on 20 patients as a new cosmetic surgery option for small-volume breast augmentation, with the goal of achieving both lasting and natural results. Cytori plans to develop the significant longer-term market opportunity for cardiovascular and heart disease on its own, supported by development and product revenue over the next few years. Cardiovascular procedures are expected to be priced at about $10,000 per procedure, reflecting the more invasive, acute nature of these procedures versus less invasive banking and reconstructive procedures which are expected to be priced at less than half of this amount.
Product revenue should begin to ramp-up from initial 2008 levels of $10 to $12 million as post-marketing studies support wider adoption and reimbursement of the company’s disruptive technology in the medical community. Specifically, I expect Cytori to record sales of $40 - $50 million in 2009 and over the $100 million milestone by 2010, resulting in earnings power around $1 per share assuming a fully diluted share count of 30 million in 2010. The sale of non-core assets and development revenues should allow Cytori to reach sustained profitability by 2010 and provide the company with sufficient non-dilutive sources of cash to maintain a low share count, which currently stands at just over 26 million.
Cytori was recently added to the Russell 2000 Small-Cap Index as of the market close on June 27, 2008, resulting in a nice pick-up in average daily trading volume to about 500,000 shares over the last 10 days versus an average of about 160,000 shares over the last three months. Inclusion in this widely followed small-cap stock index leads to ownership of Cytori by funds that track this index, which should lead to increased institutional ownership and higher trading volumes over the next year.
The closing price of $5.72 Thursday is closer to the low end of the 52-week range of $4.62 - $8.56, resulting in a market cap just under $150 million after recently touching new highs earlier in June. The share price has been volatile recently, most likely due to the recently completed Russell rebalancing, so it may be wise to scale into long positions in Cytori by committing no more than 25% of a desired position in the stock at a time. The company’s disruptive cell therapy and banking applications have the potential to reward investors over the long-term with multi-bagger gains over time as more clinical trial data leads to wider adoption and insurance reimbursement for its procedures which will translate into profits for Cytori and its investors. Over time, the stock market is likely to value Cytori more in-line or above its larger stem cell industry peers such as Geron (GERN) and Osiris Therapeutics (OSIR), which are valued at market caps of $270 million and $400 million, respectively.
Disclosure: Author holds a long position in CYTX