The term "Giant Killer" is a well-known concept that has been ingrained in most people from an early age. From fairy tales to Greek mythology, the act of slaying giants has remained a popular image in the psyche of people. The most famous of all the tales is the story of David and Goliath. Within this account a meek and mild young boy named David was able to defeat a huge Philistine warring giant named Goliath. According to the story, David conquered the giant with the help of divine intervention and a simple sling and stone.
An interesting story, but how does it apply to investing in a speculative biotech stock like Advanced Cell Technology (ACTC.OB)? To answer that, one has to dig a bit deeper into the company. For those new to this name, ACTC is a biotechnology company that engages in the development and commercialization of human embryonic and adult stem cell technology in the field of regenerative medicine.
Much like David was seen before his battle, speculative biotech stocks in general are viewed as rather puny and insignificant entities. These companies have unproven products/track records, and shaky financial structures usually have them in a never ending state of limbo in the minds of investors. Many feel that no one in their right senses should invest in these small companies. It is at this point where we find ACTC in the minds of many investors.
So what makes ACTC a potential "Giant Killer" is the real question. The answer to that lies within the company's technology and financial strategy. David used basic physics in the form of centrifugal force to beat the Philistine giant. ACTC's weapon will be the new technology that revolves around the use of age old stem cells. Stem cells and their attempted use in major medical events have been around for quite a while. Their potential was dealt a blow when a major company in the field, named Geron (GERN), left the stem cell world of regenerative medicine to focus on other products. It seems that the stem cell trials failed to meet the company's expectations, and Geron and many investors threw in the towel. With GERN out the picture, ACTC was thrust into the limelight as the heir apparent to the kingdom of stem cell therapy.
Since then ACTC has been on the move. Stem cells could potentially be used to treat a wide variety of medical conditions, but ACTC decided to tackle macular degeneration first. This unmet medical need has more than 50 million patients in major markets. According to the company, a 1% market penetration may represent a $5-10B market opportunity. Waiting in the wings one finds ACTC's mesenchymal stem cells (MSCs) which could be used to regulate immune responses and provide therapeutic potential for treating autoimmune or inflammatory diseases. Then comes the company's vascular program where ACTC works with hemangioblast cells that can be used to produce all cell types in the circulatory and vascular systems.
Without getting too far ahead of ourselves, let's simply look at ACTC's macular degeneration trials with multiple eye centers in both the US and Europe. According to ACTC's most recent investor's presentation, there are some very encouraging results. Currently we find that ACTC has treated its eleventh overall patient in the Stargardt's [SMD] and dry AMD clinical trials. For all eleven patients there have been no reports of any adverse events or complications. In some instances, ACTC has noted some rather amazing results. In one SMD patient the individual improved from seeing hand motions to 20/800, and improved from 0 to 5 letters on the ETDRS visual acuity chart. In the dry AMD patient, the vision improved from 21 ETDRS letters to 28 on the chart. At the one year follow-up for these patients, the visual acuity gains remain relatively stable. The SMD patient continues to show improvement even to this day. SMD all by itself has quite a potential as well. It is estimating that a 10% market penetration with reoccurring treatments every 3-5 years can be a $100+ million/year product.
It's obvious that ACTC has quite the potential weapon in its stem cells lines. The question is if that is enough to guarantee success? The answer is no, not even close. If the technology is the catalysis for the company, then the financial funding is the driver that will make it all happen. For the second quarter of 2012, the net cash used in operations was $2.9 million. ACTC ended the 2012 second quarter with cash and cash equivalents of $9.9 million. Basically ACTC was running out of funds to operate with.
Looking back to our story, we find that David had the right weapon but needed a higher power, or divine intervention, to help him in is struggle. ACTC also needs assistance or a higher power in its quest, but its source will not be divine in nature. A closer look though does reveal some very interesting revelations. Out of the blue on September 20, 2012, the company announced it has entered into a $35 million common stock purchase agreement with Lincoln Park Capital Fund, LLC. Lincoln Park Capital is a Chicago-based institutional investor that made an initial purchase of $800,000 in common stock from the Company at a purchase price of $0.08 per share.
Under this agreement, ACTC has the right over a period of three years to sell up to an additional $34.2 million of its common stock to Lincoln Park Capital. The proceeds from this transaction will be used to fund the company's clinical activities, including its three ongoing Phase I/II clinical trials for forms of macular degeneration, for development of its other clinical activities, and for general corporate purposes. The $35 million available under the agreement equates to more than two years of funding for ACTC. Under the terms of the agreement, there are no upper limits to the price that Lincoln Park Capital may pay to purchase the company's common stock. Also this transaction in no way impedes or changes ACTS's goal of completing a reverse split in order to uplisting on the NASADQ in the near future. Finally, Lincoln Park Capital has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the company's shares of common stock.
The question becomes what does Lincoln Park Capital see in ACTC and its technology that others don't? Lincoln Park Capital is full of smart individuals, and this company is not in the business of losing money on long shot bets. According to a statement by Lincoln Park, the company has been following the progression of ACTC over the past several years and are excited to be making this investment. Does Lincoln now see the Giant Killer potential?
We now have ACTC armed with potent stem cells and enough financial backing for the time being. The question now is what giants are at risk from this small company. Big pharmaceutical companies cannot afford to ignore small, innovative biotechs like ACTC. Too much invested capital and market share are at stake. Millions, if not billions, of dollars can go up in smoke as new and more innovative products make their way into the medical community, crowding out older obsolete products.
Before diving into the list of potential giants at risk, let's get a few facts about AMD that are pertinent to understand why ACTC is such a threat. There are two types of AMD: dry (atrophic) and wet (neovascular). The dry type affects approximately 85-90% of individuals with AMD, while the wet type affects approximately 10-15% of individuals with AMD. That being the case, wet AMD accounts for approximately 90% of all cases of severe vision loss from the disease. Although dry macular degeneration does not necessarily turn into the wet form, almost all cases of the wet form do begin as the dry. At this point one should begin to see how ACTC with its dry AMD treatment could pose a threat.
Giants at Risk
Our first set of giants that could be laid low is Roche and Novartis. These are some of the biggest names in the industry. What is at stake for them is the drug Lucentis which has been approved to treat the wet type of age-related macular degeneration. Last year Lucentis made $1.4 billion in US sales alone. If ACTC's stem cells are to prove cheaper and a better overall therapy, then the giants that are Roche/Novartis might share a similar fate as Goliath in their ocular programs.
Regeneron (REGN) /Bayer
This dynamic set of giants will obviously be at risk when it comes to the product Eylea. Much like Lucentis above, Eylea is a treatment for patients with neovascular (Wet) AMD. Bayer HealthCare and Regeneron are collaborating on the global development of EYLEA. In this deal, Regeneron maintains exclusive rights to EYLEA in the United States, while Bayer HealthCare licensed the exclusive marketing rights outside the United States. The agreement so far states that the companies will share equally the profits from any future sales of EYLEA, except for Japan where Regeneron will receive a royalty on net sales. Early this year it was expected that a full-year U.S. Eylea sales should come in at roughly $700 million to $750 million.
Pfizer is also another giant that could fall victim to ACTC's sling. Unlike the other names above that have existing products on the market, PFE's risk may arise around a particular licensing agreement. In recent news, PFE announced that it intends to collaborate with the University College London [UCL] on stem cell therapies involving macular degeneration. The main focus will be on gaining a better understanding into how to develop stem cell-based therapies for certain ophthalmic conditions.
Under the terms of the agreement, Pfizer will provide funding to UCL to enable research into the development of stem cell-based therapies for AMD. Needless to say, funding such an effort is not going to be cheap. If PFE can complete its preclinical safety studies, then the company plans on conducting clinical trials to determine efficacy of treatment and commercialize any resulting product.
So why would ACTC be a threat to PFE's new deal? The issue could be that ACTC is already well ahead in this race with its trials for AMD. Also Advanced Cell has an ace up its sleeve in the form of an extensive patent portfolio within this arena. Needless to say, patent infringement claims could easily throw a wrench into the works for PFE and cause huge time delays.
If Goliath had it to do over again, do you think he would challenge David to yet another round? Probably not, but I bet he would instead try to sway David into joining his side. It is very doubtful that David would have ever changed sides, but the same cannot be said for ACTC. In fact, ACTC has stated on multiple occasions that it intends to partner the technology in the end. The question now comes down to which giant will step forward with the most money in hand to make this happen. Currently dry AMD is an unmet medical need. The giants fight over the wet AMD side of the house with a small 10-15% of the total AMD population. With dry AMD affecting the remaining 85-90% of individuals with AMD, this market is crying out for a champion. If ACTC can prove the science then it too will become a giant. Throw on the other programs in their pipeline and it could become a Kraken, but that is another story for another time.
Disclosure: I am long ACTC.OB.