Cellular Dynamics: A Speculative Life Sciences Company Worth Getting To Know

| About: Cellular Dynamics (ICEL)
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When it comes to Jim Cramer, there are a multitude of varying opinions. As a television personality, a well-known former fund manager, and a bestselling author, his popularity and exposure open him up to a fair amount of criticism. As a result, some opinions of the man are less than kind. However, there are also some people who see Mr. Cramer as an advocate of the "little guy", and a beacon of light for the retail investor. No matter what one's opinion of the man may be, he has always preached one piece of universally relevant advice; know what you own.

This premise would appear to be a restatement of the obvious. However, be assured, this bit of guidance cannot be overstated enough. The fact of the matter is, many investors, especially those considered to be "novice investors", do not employ this instruction nearly as often as they should. However, in fairness, that is not entirely their fault. Sometimes, knowing what you own can be a daunting task. It is difficult enough for the "stay at home investor", the "retail investor", or the "novice investor", to regularly keep up with the market and it's constantly metamorphic landscape. After all, usually these investors have other obligations to tend to such as families and careers. Thus, how can one be expected to find the time required to truly know their stocks, and the impending market catalysts?

It is in situations such as these where platforms such as Seeking Alpha fill a substantial need. Regulated, informative, web based forums, where a free exchange of competent investment ideas is fostered, are an invaluable tool for investors with lives outside of their portfolios. However, that then brings up another mild predicament which must be considered. Are the articles written and published on these sites always fully comprehensible to the readers? The answer is no. However, this is no fault of the publishing entity or the forums their editors serve. This is a problem to be solved by the authors. It is easy to forget sometimes that not every reader possesses the same aptitude or background. It is too often forgotten that editorials are frequented by potential shareholders whose technical analysis skills, or sector specific vocabulary, may leave much to be desired. It is regularly overlooked that these potential investors work just as hard for their money, as the hedge fund manager with a master's degree in financial engineering.

It is with these thoughts in mind that this article will offer an overview, insight, and analysis, of Cellular Dynamics International (NASDAQ:ICEL). This Wisconsin based life sciences company is a worldwide leader in ISPC technology and the manufacture of human cells. Cellular Dynamics, or CDI as it is more commonly referred, exists in a highly technical and vernacularly specific niche. This could potentially make understanding the company as an investment vehicle a challenge for some. Therefore, this article will attempt feverishly to explain what it is CDI does, and why they are a viable investment, in a method capable of being understood, and considered, by investors from all walks of life. With that said, let the introduction to Cellular Dynamics begin.

Cellular Dynamics: A Cursory Introduction

Before any reasonable person can consider investing in any company, they must first answer one simple question; what does this company do? Of course, there will be many other questions that follow, but before procuring answers to those questions one must first have a firm grasp on understanding what the company does, and why they do it. It sounds basic enough, but for many investors this question often goes unanswered. Such will not be the case here.

CDI, by their own definition, is a company that "develops and manufactures fully functioning human cells in industrial quantities to precise specifications." Now, that answer is clear and concise, but for many prospective shareholders, it is also ambiguous and misunderstood. What does it mean to "manufacture human cells" and why would anyone do so in "industrial quantities"? That sounds portentously like a tagline for a horror movie. What it is however is a revolutionary science that is slowly becoming the new standard for cellular therapeutics and pre-clinical testing of developmental drugs. It simply needs to be elaborated on further, and in an easy to understand language free of any terms that could be lost in translation.

In order to better understand what CDI does, one needs to start at the beginning. There, one will find the baseline for CDI's proprietary technology. The technology and innovations being employed at CDI are derived from "Induced Pluripotent Stem Cells." In scientific circles, these are referred to as "iPS Cells." An "iPS cell" is not a typical embryonic stem cell. In fact, it is not an embryonic stem cell at all. An "iPS cell" is a skin or blood cell that has been genetically reprogrammed through forced expression of pluripotency genes. These cells can then replicate indefinitely, and have the potential to differentiate into any cell type in the human body. Now, again, this likely requires a more easily understood definition;

Stem cells are, as most Americans know, a highly contentious topic in medical research and regenerative medicine. This controversy exists largely because the origins of traditional stem cells ascend from human embryos. During embryonic development, specialized cells, such as immune cells, arise from a common stem cell that organically differentiates as a result of cellular changes triggered by specific gene patterns. In other words, at the risk of oversimplifying the process, these specialized cells, exclusive to one's genetic make-up, separate and distinguish themselves as regenerative catalysts for one's development. They're like seeds for individual genes. Scientists can retrieve these cells, and use them as instruments for studying development or, as an instrument for therapeutic purposes such as transplantation. What science has been in need of is a different type of stem cell, of non-embryonic origins, that is capable of serving the scientific community without the controversy. This is where CDI, and their "iSP cell's", become invaluable.

The ethical concerns associated with traditional embryonic cells are circumvented by the realization that skin or blood cells, from an adult source, can be reprogrammed to a pluripotent state. A "pluripotent state" simply means that a stem cell rediscovers its ability to differentiate into different cell types. It is, for lack of a better term, a stage where the cell has yet to define itself. Furthermore, if cells are recovered from a human donor, who will later receive the differentiated cells, this method also largely mitigates any adverse immune reaction encountered during transplantation. In other words, by "manufacturing fully functioning human cells to precise specifications", from a consenting adult, who will later receive their reprogrammed cells as a therapeutic treatment, the "iPS cells" operate relatively free from controversy and at a far reduced level of risk.

The visual aid below shows a rudimentary synopsis of the process;

As can be seen, the end results, and or conclusion of the process, can be two fold. They could serve the needs of transplantation or, the needs of scientific exploration, research, and testing. For the purposes of this article, and the analysis of CDI as an investment vehicle, the focus will be on the latter.

Cellular Dynamics: Technology and Operations

At CDI the technology and business plan are focused on three principal markets; the in vitro use of cells in drug discovery and testing, stem cell banking and storage, and cellular-based therapeutic research. Collectively, according to Adivo Associates, the combined addressable markets for these three areas is approximately 10 billion dollars. Needless to say, an addressable market of that size lends itself to tremendous opportunity for a company with a current market cap of less than 250 million dollars.

The question then becomes, how does CDI capitalize on this market, and why are they better positioned to do so than other competitors in the industry? While there are multiple ways to answer this question, this article will focus on two components specifically; innovation and leadership, and technology.


CDI employs approximately 116 people, each of which is undoubtedly well qualified for their position. However, the quality of employees at the top of CDI's corporate hierarchy is something to marvel at. Of the six men who occupy lead management positions at the company there are three Ph.D.'s, a Harvard MBA, and two attorneys from tier one institution's. As it pertains to the company's Scientific Advisory Board, CDI has almost an embarrassment of riches. First, there is Dr. George Church, a professor of Genetics at Harvard Medical School, the director of numerous genomic science committees, and a member of both the Wyss Institute and the Board Institute. He owns has 34 patents including molecular multiplexing and tags, homologous recombination methods, and DNA array synthesizers

Next, there is Dr. Lee Hood. Dr. Hood is the President of the Institute for Systems Biology and was a member of the team at Caltech that developed the instruments required for the successful mapping of the human genome. He is a world renowned pillar of the biotechnology field, and has been the recipient of numerous awards. These awards include, but are not limited to, the Lasker Award for Studies of Immune Diversity, the Kyoto Prize in Advanced Technology, the Heinz Award for Pioneering Work in Systems Biology, and most recently, the coveted NAE 2011 Fritz J. and Delores H. Russ Prize for automating DNA sequencing that revolutionized biomedicine and forensic science. He has also received 17 (yes, that says 17) honorary degrees from prestigious universities in the US and abroad.

Lastly, there is the Chief Scientific Officer at CDI. His name is Dr. James Thompson, and his resume reads like an over exaggerated Wikipedia page. As one of four listed founders of CDI, James Thompson is an innovator of the highest order. In addition to having earned both his VMD and Ph.D. from the University of Pennsylvania, he has been the recipient of numerous awards, appointments, and acknowledgments.

Dr. Thomson's derivation of human ES cells was featured as Science Magazine's "Scientific Breakthrough of the Year" in 1999. Moreover, the research and work completed at Dr. Thompson's laboratory has been cited in Time Magazine's "Top 10 Discoveries of the Year" on three separate occasions; for the isolation of human ES cells in 1998, for the isolation of human iPS cells in 2007, and for the collaborative mapping of the human epigenome in 2009. In fact, in 2007, Dr. Thompson was named by Time Magazine as one of the "100 Most Influential People in the World." Furthermore, Dr. Thompson has published more than 150 scientific, peer reviewed papers, and has been an inventor on 30 issued patents.

In serving as the current CSO of CDI, as well as functioning as a director on the company's board, Dr. Thompson has been a fervent supporter and driving force behind the company's scientific advancement, and has been pivotal in their ability to further attract some of the brightest minds in the field. It is the lifetime body of work attributed to Dr. Thompson that serves as the foundation for nearly all the developments at CDI to this day.


So, it is obvious, at this point, that "iPS cells" are innovative and serve a substantial need in the scientific community. It is also grossly apparent that CDI is in possession of leadership and talent capable of making any biotechnology entity swoon with envy. It has also been made known, that the primary objective of CDI's work currently, is for scientific services and research. So, how do these three things come together in the creation and applicability of CDI's proprietary technology?

As has already been seen above, at the end of the section entitled "Cellular Dynamics: A Cursory Introduction", there is a baseline process for the harvesting and reformulation of "iPS cells". However, as it is specific to CDI, the explanation and visualization is slightly different. Directly below, one can see the diagram provided from the CDI website;

As can be seen, the diagram from the CDI website makes a distinction between two programming methods; episomal and viral. CDI utilizes the episomal method. The episomal reprogramming method introduces pluripotency genes into a target cell using circular DNA plasmid vectors (i.e. episomes) that replicate autonomously within the cell cytoplasm and do not integrate into the host cell genome. This is a distinct advantage to the viral method. The viral methods, although effective, integrate the genome of the target cell. That is to say, when the viral DNA mixes with the host genome it could introduce foreign DNA into the resulting "iPS cells". This can result in defects and errors. This is referred to as "leaving a footprint." When cells are plagued with a footprint, it can adversely affect the results of any testing, discovery, banking, or evaluation of product and process. Put it this way, it would be like mopping the floor in one room, getting dirt and residue in the water, and then proceeding to clean the next room without first cleaning the water. The second rooms end result will be inconsistent with the first due to the fact that the mechanism (the water) has been altered (it's dirty). Who wants to clean a floor with dirty water?

Now, as it pertains to the episomal method, the process preferred and utilized at CDI, the end result of the cells is that they are "footprint free." In other words, since the episomal vectors replicate autonomously within the cell cytoplasm, and do not integrate into the host genome, there is no chance of foreign DNA being introduced. The end result of testing when these cells are utilized ensures greater efficacy, accuracy, reliability, and safety. This is why the scientific community is rapidly developing intolerance for cells reprogrammed by the viral method, and demanding cells developed by the episomal method at CDI. CDI owns the patents, and/or the exclusive licenses to the patents, for all relative scientific processes pertaining to episomal reprogramming.

As Jim Cramer Says, "Know What You Own"

So, why is it important that a prospective investor truly understands what it is he, or she, may elect to invest in? The reasoning is simple; because knowing what you own allows you to make informed decisions. If you know what you own, or what you may soon invest in, you are better equipped to know when to add to your position, when to sell off part of your position, or how to read into market indicators that aren't included in company press releases.

For example, so far this article has covered the basics of CDI and their leadership, technology, innovations, and target markets. Hopefully, these basics have been presented in such a way that any reader feels confident in their knowledge base to this point. However, there is far more to the company that what has been covered thus far. Take for instance a point made by a popular Boston based blogger. Steven Dickman is the CEO of CBT Advisors, as well as the owner of the blog Boston Biotech Watch. He is generally well received by his readers and appears to be even handed, and equitably fair, in his entries and assessments. He recently blogged about the impending need for alternative testing methods in both the pre-clinical phases of drug development, and in patients plagued with long-term disease. He wrote, as it pertained to patient specific testing, the following;

"Another level of utility not yet addressed by TissUse, but surely on the horizon, is patient-specific testing of medications outside the body using iPS cells (inducible pluripotent stem cells). Scientists create these cells from human skin or other tissues and "reprogram" them to become cells of almost any tissue. Companies such as Cellular Dynamics in Madison, Wisconsin, are already beginning to deliver large quantities of iPS cells on an industrial scale and with pharmaceutical quality controls in place. In my view, that source of supply alone is a game-changer for drug testing. The company had a surprisingly strong IPO given the 'picks-and-shovels' nature of its business, probably because its revenues are growing nicely. It won't be long, I predict, before innovative companies start to offer outside-the-body testing especially for patients with chronic or long-term diseases who can therefore afford to wait to have their cells custom-grown."

Other than the fact that not all analysts agree that the CDI IPO was "surprisingly strong", the message here is clear; the exploration of, and excitement about, the uses for "iPS cells" is growing, and forging new opportunities. For an owner of shares in CDI, this type of news would be encouraging and thought provoking. However, it would require that shareholders fully understand what it is the company does that they own, in order to appreciate the future potential that exists in its technology and intellectual property. One cannot depend solely on press releases from the company to provide them insights and information as it pertains to their stock. Furthermore, charts, algorithms, and data never tell the whole story. For an investor, understanding what you are invested in, and "knowing what you own", will enable you to gain insight and knowledge from multiple sources, both directly and indirectly.

For those of you who desire to understand the additional details of each product offered at CDI specific to their Induced Pluripotent Stem Cell Technology, please follow the below links to product descriptions from the company's website;

iCell Cardiomyocytes - Human heart cells derived from induced pluripotent stem cells and specifically designed for drug efficacy research, toxicity screens, and other medical services.

iCell Endothelial Cells - Human induced pluripotent stem cell-derived interior surface blood vessel cells for vascular-targeted drug discovery and predictive disease modeling.

iCell Neurons - Human induced pluripotent stem cell-derived brain cells for drug discovery, neurotoxicity testing, and disease research.

iCell Hepatocytes - Human liver cells, produced from induced pluripotent stem cells, for disease modeling and preclinical drug development.

MyCell Products - Induced pluripotent stem cell technology offering unprecedented access to human biology and opportunities to significantly advance the fields of disease research, drug screening, and toxicity testing.

Recent Happenings and Financials

Having just made their public debut on the NASDAQ this past summer, CDI has only reported financials for one quarter thus far. However, the company did offer insight into their year-over-year comparisons from their final year as a private entity. The highlights and details of their inaugural quarter are itemized below;

• The growth margin from product sales was 79% for the quarter, and thanks to the proceeds from the company's IPO and debt financing, they declared 68.6 million dollars in cash resources with which to pursue further strategic objectives.

• Having just completed their IPO, cash obviously dominated the company's balance sheet for the quarter. However, inventory did grow from 2.4 million dollars in December 2012 to 3.5 million at the end of Q3 2013. The company attributed this to the fact that unlike other cell manufacturers they can manufacture and cryopreserve human cells for inventory. As a result, they have the ability to manufacture products in efficient and cost-effective batch sizes, in anticipation of future demand. That is what they have claimed to have done in growing their inventory. They are functioning in anticipation of a forecasted increase in demand for their current products in 2014.

• For the nine months ended in September, the company's earnings per share represented what they referred to as, "a rather odd result." For the nine months ended September 30, their net loss increased by 1.8 million dollars while EPS decreased for the nine months from 9.54 per share to 3.49 per share. In referencing this outcome, company CFO David Snyder made the following comment;

"this reflects the significant difference in common shares outstanding pre- and post-IPO, due principally to the conversion of the preferred shares, but also, of course, due to the additional common shares issued with the IPO. Also, the three month per share numbers exhibit the same pattern, and for the same reasons."

• As it pertains to revenue, year-over-year, the third quarter was indicative of 25% growth, reporting 1.5 million dollars for 2013 compared to 1.2 million dollars for 2012. For the nine month period, revenues grew in excess of 100% from 3.6 million dollars in 2012, to 7.7 million dollars in 2013. In regards to the trailing 12 months, growth was also in excess of 100%, increasing from 4.5 million dollars to 10.7 million dollars.

• In regards to Research and Development expenses, cost for the quarter grew from 3.5 million dollars to 3.9 million dollars year-over-year. As it pertains to the comparative nine month period, costs grew from 10.4 million dollars to 11.7 million dollars.

To view the 10-Q filed for the quarter in its entirety please follow this link.

Following the quarter, on November 4, 2013, the company also announced that it entered into a definitive agreement with the California Institute of Regenerative Medicine to create a human induced pluripotent stem cell biobank. The contract was worth approximately 16 million dollars. In summarizing the quarter, and speaking about the contract, CDI CEO Bob Palay made the following statement;

"To summarize, CDI experienced rapid, over 2x revenue, growth during the third quarter, primarily from our iCell products currently targeted at the in vitro market. These products continue to turn out a healthy gross margin of 79%. The signing of the $16 million CIRN deal marks our entry into the stem cell banking market.

Our game plan is to continue to invest in new products in order to capture a significant share of an approximately $10 billion market. We are a young company. Our results are likely to vary from quarter to quarter, but our goal is clear. We encourage our investors to evaluate us as I do, based on our progress towards our goal of setting the industry standard for manufactured cells."

Cellular Dynamics as an Investment Vehicle

When it comes to a company like Cellular Dynamics, that has only been publicly trading for a few months, and that has only reported quarterly financials one time, forecasting their performance can be a daunting task. Determining a run rate, or evaluating a balance sheet with a heavy cash presence, fresh off of an IPO, is nothing short of a fool's errand. However, there are some points to consider and evaluate. First of all, of the nearly 16 million shares outstanding, over 31% are held by institutional investors. These institutional holdings have increased from 4.24 million immediately following the IPO, to 5.93 million at the current time. That represents a 40% increase in institutional holdings over just five months. This would indicate an increasing faith in CDI's long term prospects from qualified institutions.

Secondly, the company has shown substantial increases in revenue over a nine month comparative period. For the nine months ending in September, revenues grew at an equitable rate of over 100%. Thirdly, CDI continues to actively pursue new contracts and opportunities. As was previously mentioned, the company procured a 16 million dollar contract with the California Institute of Regenerative Medicine in November. Since then, the company has also agreed to collaborate with the Jain Foundation in researching muscular dystrophy, and with the Hamner Institute to develop predictive in vitro screening assays for chemical, environmental, and pharmaceutical toxicology assessments. These partnerships and collaborations will not only, in some instances, result in growing revenues, but will also, and perhaps even more importantly, result in ongoing research capable of increasing the company's exposure and marketability.

Next, and this cannot be overstated, the senior executives at CDI are exemplary. The research and development being conducted at CDI is continued from the research and findings of their CSO Dr. James Thompson. In the world in which CDI exists, the company could not have a better foundation that the innovation and findings of Dr. Thompson. Then, lastly, one cannot ignore the company's intellectual property. In addition to the patents and exclusive licenses for all relative scientific processes pertaining to episomal reprogramming, CDI also owns the rights to over 100 additional patents in both the U.S. and abroad. As this technology continues to become the standard for applicable research and testing, there will be no company better positioned to seize opportunities than CDI.


Needless to say, not everyone shares this articles bullish perspective on CDI. In November, following some awkward and ambiguous statistics reported by CDI for the third quarter, the highly regarded firm of Leerink Swan downgraded shares of the company after citing that third quarter results "fell slightly short" of their forecast. For this article to call that downgrade misguided, or off-target, would be shortsighted and bias. The truth is, increases in R&D expenses, and decreases in EPS, are perfectly reasonable points of contention for other analysts to be concerned about. Furthermore, the company continues to see a growing accumulative deficit and an increase in long term debt. These are all reasonable causes for bullish hesitation. If these trends were to continue, and if CDI struggled, for any reason, to continue its growth in the areas of stem cell banking and therapeutic partnerships, the outlook of the company could be volatile and depressed.


The objective of this article was to present an overview of CDI for investors of all credentials and capabilities. Often times, especially in the biotechnology sector, prospective investors can get lost in the technical verbiage, scientific theorems, and intricate details of systematic methodology. This can be overwhelming, and can, in some instances, turn off investors from a sector entirely. That would be unfortunate. With the right biotechnology investment, shareholders can see considerable returns, and add extensively to their available financial resources. Is CDI that type of investment? It could be, but that is something each investor must decide for themselves.

What's more important here, is that if an investor does initiate a position in CDI, that they know what their buying so that they eventually "know what they own." What CDI offers is innovative science that could become the new standard for drug discovery, toxicity testing, chemical safety, stem cell banking, and cellular based therapeutic research. The company has shown an increase in revenues, a devotion to growth, and a commitment to their innovation moving forward. Perhaps the promise of CDI can best be summarized in a quote from the company's CEO;

"I believe we are the leader in this field, and I also believe our capabilities are unprecedented. We have the ability to develop and manufacture human cells to precise specifications…….."

He went on to say;

"We believe that products based on human cells, developed and manufactured to specifications based on IPSC technology, offer significant competitive advantages, offering CDI the long term opportunity to become a force in large markets."

He wasn't exaggerating. With addressable markets worth no less than 10 billion dollars, and a significantly conservative current market cap of 250 million, the growth potential for CDI is substantial. Furthermore, given the growing popularity of cells developed by the episomal method in the scientific community, one can expect the addressable markets to continue to grow for CDI exponentially. This bodes well for the company's future.

In consideration of these truths, as well as the information detailed herein, CDI appears to be an enticing investment over the next 3-5 years. During the first year of the company's public presence, there will likely be some volatility. It would even be reasonable to see a slight decline from current levels while the company finds its way. However, with revenues growing at a 12 month trailing rate of over 100%, and future exposure already indicated in partnerships and collaborations, it would also be reasonable to see EPS bounce back within the next 2-3 quarters. Based on the rate of growing revenues, and the company's commitment to procuring additional revenue streams, 30% upside from current levels over the next 12 months seems more than reasonable. Beyond that, growth and returns could increase profoundly.

One Final Thought

The value of one man's constitution is often underrated. Analysts examine every facet of statistical data, measurable criteria, and trends in momentum. It is admirable, and worthwhile, but it never tells the whole story. When a company is new to the public scene, and exists in a sector where innovation, creativity, and abstract thought are prerequisites to success, sometimes, one man's devotion is more valuable than anything else. Sometimes, one man determines the route so many others will travel.

Perhaps this theory is best represented from a most unorthodox source. Think back for a moment to the 2006 film "The Departed." The film begins with a rather ominous line. Jack Nicholson, the actor who portrays Frank Costello, a fictional Boston crime boss, offers viewers an immediate insight into one of the films principal themes by making the following statement;

"I don't want to be a product of my environment. I want my environment to be a product of me."

With those 20 words, the audience is immediately drawn in. Individual viewers are instantaneously intrigued. It's a menacing, audacious, and inevitably prophetic statement. It was a brilliant way to start an excellent movie. However, those words, when applied to a different and less dramatic context, can also offer valuable insight into the establishment of innovative and pioneering companies. After all, companies have a tendency to reflect the attitudes and ambitions of their founders. These founders are often courageous, forward thinking, and determined entrepreneurs who are tirelessly devoted to transforming their respective fields. Much like the infamous Frank Costello, these inspired pioneers of industry are not interested in being "products of their environment"; rather, they are hell-bent on ensuring that their "environments" become "products of them."

This attitude has proven to be a catalyst for awe-inspiring success. Steve Jobs employed this approach, as did Sir Richard Branson. These men epitomize the idea that the most capable, spirited, and ingenious of industrialists can create companies that forever change the sectors they operate in. CDI has such a man in James Thompson. He is to cell biology what Steve Jobs was to computers, and what Richard Branson is to just about everything else. So when one considers an investment into CDI, consider the traditional facets of equities analysis, and be sure to thoroughly conduct your own due diligence. However, do not discredit or disregard the fact that the man behind the company is as capable, and ingenious, as perhaps any man, has ever been, for any company. He, and his associates, make CDI a company worth keeping a watchful eye on.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: It is advised that all prospective investors complete their own relevant due diligence prior to initiating an investment into any company detailed herein, or on any other web based platform.