DISCLAIMER: I am long ACTC, and recommend holding the stock until you need to sell it for personal cash flow, or to sell half when the p/e ratio drops below 100, and the remaining half when it drops below 50. In the absence of adverse scientific results, this opinion will not change.
I am a horseplayer by nature, yet have abandoned the racetrack for a more potentially lucrative gamble on the biotech sector, specifically the stem-cell space. In that space, a ragtag bunch of dreamers are staking their future on companies with no earnings, little revenue, a market cap lower than the petty cash for most companies on the major indeces, and a great story which hints at a future of untold wealth brought by life-changing medical technology. No company encapsulates the biotech dream more than Advanced Cell Technology Corporation (ACTC.OB), one of the more intriguing penny stocks of all time. The nature of companies like ACTC are such that valuation can seem impossible, yet the view from here points to a very concrete price target of $8, a 10,000 percent increase over its recent closing price of $0.08, a number to which it has been glued for the past few weeks.
First, some background. As an office worker in the 1990s, I deliberately worked in a succession of diverse professional environments, with the goal of developing a comprehensive understanding of business, and an eye towards one day starting my own. One stop along this path landed me at a university medical-center in 1993, when the human genome had just been discovered. I was involved in the recruitment of the gene-therapy superstar researchers of the day, and got a bird's-eye view of this game-changing technology, which would one day cure diseases with a single DNA shot. Fast-forward to today, and this dream is about to become a reality. To many of the most brilliant medical minds of our time, gene therapy,or what we now call stem-cell therapy, has been treated as inevitable, a question of when, not whether.
In 1993, I eschewed investment in the biotech sector because the insiders had too much of an information edge for me to be confident in my ability to find value. Instead, I focused on more transparent betting vehicles, like professional and college sports, or horse racing, giving nary a thought to the biotech sector. I picked a few winners during the internet bubble which soon followed, but once that burst, the racetrack-style returns become difficult to find, except briefly after the 2009 crash. I have never been swayed much by 10-20 percent annual returns, since that requires a large nest egg, and an income outside the market, for one to be able to park their money for the long term. I only pick a stock if I think it can hit a grand slam. ACTC qualifies as a potential grand slam on all counts, perhaps imminently. The stock is like a coiled spring waiting to explode. I found it not because I was looking for stocks, but because my poor vision led me to wondering where my "gene therapy shot" was. I then found ACTC.
ACTC's business model is simple: they are developing patented stem-cell therapies for numerous chronic conditions, most with multibillion dollar markets. Their "canary in the coal mine" is their RPE cell product, a stem-cell therapy for both Dry Age-Related Macular Degeneration (dry AMD), and Stargardt's Macular Dystrophy, the latter giving them orphan-drug status. This therapy has already worked in other species, and is currently in a Phase I trial to determine its safety and efficacy. Recently, lead doctor Robert Lanza let slip that one of the patients in this study had improved their visual acuity from 20'/400 (legally blind) to 20/40 (able to drive) within a few short weeks. Since this disclosure, the stock has rebounded from $0.065 to its current valuation. Some might wonder why the spike has not been higher, although most who are familiar with this sector can recite the reasons in their sleep.
While the RPE cells have multibillion dollar potential, they are really just the tip of the iceberg for ACTC. The political and investment climates have been horrid, leading to scarce funding, scant investment, and regulatory obstacles only recently cleared by the NIH. If this study proves successful, its commercial potential will run in the billions, and will ensure funding of the many other multibillion dollar therapies in the ACTC pipeline. The dam would literally burst. Why, then, is ACTC's market cap barely over $200 million?
First and foremost, the ACTC story is not a new one. A quick review of the ten-year chart shows a nightmarish 99 percent plunge in share price , from a 2005 peak of $8.00 to the current $0.08. The primary culprit for this has been dilution, fueled in large part by toxic financing, yet these were merely symptoms of an obstructionist political climate, one which forced all stem companies to have to burn money while waiting for permission to work with embryonic cells. While they were waiting, alternatives to the HESC lines were discovered, and I'll address that in a moment. For investors, the dilution has left many bodies strewn along the road to this promised land. Keep this in mind, because I could have made an equally convincing case for this stock back then, and lost everything. Investors are like the proverbial scalded cat who is afraid of cold water.
ACTC has a great deal in common with Priceline, which rose from the ashes of a split adjusted $8.00 or so to its current nosebleed price. New investors are more easily able to view the company's present potential more objectively than someone who has been burned in a now-irrelevant past. The question is whether this time is different, an equation whose answer is usually no, which means a good reason must exist for Charlie Brown to attempt to kick this football once again. I believe those reasons do in fact exist, particularly in light of the recent confirmation that at least one man has regained his vision with these cells.
While it is true that in fiction, plots which involve the blind regaining their sight generally don't end well, in real life, they can corner a $30 billion market very quickly. Even scarier is that the RPE cells work only with photoreceptors which are not dead; it has been hinted that replacement cells for the photoreceptors that might one day cure all macular problems are also on the horizon. Medically, the sky is literally the limit. Given the jackpot potential for commercialization, the question for investors is simply whether or not the science works. If it does, we win, and if not, we're bankrupt. There will not be any middle ground. The question therefore shifts to both the odds of success, and the likely market cap if success occurs. Having guzzled the scientific Kool-Aid, I am treating success as a certainty, so that leaves only the question of market cap after commercialization, and any potential bumps along the way.
Before we consider commercialization, it is wise to examine ACTC's competitors. These companies include Osiris (NASDAQ:OSIR), NeoStem (NBS), PluriStem (NASDAQ:PSTI), Athersys (NASDAQ:ATHX), and NeuralStem (NYSEMKT:CUR), all of whom have shown similar promise to ACTC, often with apparently sounder financials. As far as I am concerned, however, ACTC's financials were proven indefinitely sound by the 20/400 result. This company, more than the others, has been waiting for the right time to secure major financing, in the form of a joint venture. This has led to massive dilution, but investors need to expect a company with no revenue, brilliant talent, and intellectual property it wishes to maintain as an owner to have to do something to pay its bills. That the company can print shares anytime it needs is actually a positive indicator of investor interest.
ACTC's competitors all have in common that they rely on induced Pluripotent Stem Cells (iPSCs), or some other type of mutation which causes adult stem cells to behave like embryonic. This makes them synthetic, which is scientifically troublesome, especially with the obvious potential risks for cancer and other side effects caused by the mutations. Whatever this risk may be, it is likely far lower with "pure" embryonic cells like ACTC's. That they can extract these cells without destroying embryos allows them to avoid much political resistance while retaining the benefits of using source technology. This alone should make them the market leader for at least a decade after commercialization.
With only a proper target market capitalization left in this puzzle, I turn to Regeneron (NASDAQ:REGN) for guidance. REGN has a market cap of $23.3b, mostly due to its drug Eylea, which treats wet AMD, for a much smaller market. If ACTC's technology works, they will have a cure, not a treatment, for a condition with a much bigger market, plus a pipeline that blows away REGN and almost any other competitor. In that scenario, it is ultra-conservative to assign ACTC a market cap matching REGN's. This would put ACTC at $8.47 a share, in a very plausible scenario. Given that this is a plausible scenario, and the markets are not stupid, why then is the stock stuck at $0.08?
The most obvious reason for ACTC's deflated value, other than its previous disappointments, is that it is trading on the OTCBB, a haven for risky investments. It is a penny stock in name only, however, a byproduct of the dilution it needed to stay afloat. ACTC is still feeling the impact of its past dilution, as much of that was achieved through toxic financing deals it only recently dug out from under via lawsuit settlements. These settlements have put several of its previous lenders in large positions at a discounted cost basis to the current share price. Secondary factors include a lack of earnings visibility, and a tendency to treat undeveloped stocks as if they were mature, with technical analysis which fdoes not apply to this type of stock. In this case, however, it is the toxic financing which is the main culprit.
Dilution can be a very positive indicator with stem-cell companies. Two recent examples include ATHX, which sold off seven million shares last fall at $1.00, causing the price to drop to that level, only to rise as high as $2.42 as the new shares were burned through, and the public came to terms with the reality that the bills must be paid. NBS saw its stock plummet from $0.65 to $0.50 after AEGIS bought 20 million new shares. The public was then offered the same price, and this stock bounced back to $0.61, before settling around $0.55, with plenty of time for traders to take a quick 16 percent profit. Simply put, dilution does not bother me, and is a general indicator of a strong buy. Such an indicator is currently present with ACTC.
Those with access to Level II data, and who have reviewed the various filings, have noted that ACTC's former creditors have been selling most or all of their litigation bounty, to the tune of over a million shares a day in some cases. This will kill any rally for such a lightly-traded, speculative stock, yet this too should be seen as a positive, particularly for those who are looking to hop on board this spaceship before the door finally closes as the "cure for blindness" is confirmed. One would think that a cure for blindness would drive a stock into the stratosphere, but ACTC has been largely immune to this lately, due to selling pressure from the lenders who got their shares at fractions of today's price, and who are content to take their profit, even if they are leaving future profits on the table. Their business model revolves around buying stocks at favorable prices and flipping them for a quick profit, while holding perhaps a few percent. This temporarily deflates the share price, even in the face of good news.
While the stem-cell sector may be new, buying opportunities created by growth stocks burning through dilution is not. The companies who are dumping their shares for a quick profit are effectively underwriters for a secondary offering to the public at today's price, a price created by their willingness to exit their positions. This deflation is purely artificial, since investing logic dictates that they should not be selling their shares at all. For now, that price is $0.08. In the absence of this selling pressure, a retest of the highs of $0.27, hit twice a few years ago, becomes likely. Ultra-longs in the ACTC cult should be gobbling up any shares on the market at the current price; supplies are definitely not going to last.
The final frontier in this analysis involves joint ventures or buyouts. Big Pharma could purchase the entire stem sector with its petty cash, a constant fear of those hoping for 10,000 percent gains, who do not want to become a fraction of scaled-up slower growth. REGN has had single days where its market cap increased enough to buy ACTC outright. Many large-caps outside of this area of expertise could diversify and enhance their portfolios as well, yet no one has nibbled. Many think this is due to uncertainty regarding the sector's future, yet the opposite seems to be the case. I am more fearful that a stem-cell recipient will develop multiple personalities, or the ability to fly, than I am with ACTC being taken over.
The nature of ACTC's investors would make any offer under $1.00 or $2.00 unlikely to succeed, and the actual price could wind up much higher, since the offer itself would both spark a bidding war, and send a value signal to the public which could have the share price in a death spiral that matches each offer price. The entire sector would become ten times more expensive overnight. Because of this, the share price is likely to grow generically, as word spreads among new investors, and as positive catalysts place more future earnings on the average investor's time horizon.
With ACTC serving as Wall Street's answer to PowerBall, anyone who sinks money into lotteries, eating out, mindless entertainment, cable, or any other costly hobby, might be well served to divert that money into ACTC shares, like many of the true believes have been doing. If we're wrong, we're wrong, and life goes on, but the price of being right can literally be millions of dollars for anyone who could easily have stuck a few hundred or thousand dollars in what, very well may be the stock of the century. At the very least, it is a real company doing real things to change the world, much more than a technical chart or a quarterly financial statement representing a company whose existence the world could take or leave. This is Wall Street at its best.
Disclosure: I am long ACTC.OB.
Additional disclosure: The disclosure on ACTC is noted at the very top of the article with recommendations noted.
Disclosure: The author is long OCAT.