Advanced Cell Technology: A Key Patent Critique (Part II)

| About: Ocata Therapeutics, (OCAT)
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Advanced Cell Technology's key RPE patent claim may open the door for challenges down the road.

The recent pull back in the stock market and the biotech space in particular is poor timing for Advanced Cell Technology's planned dilutive capital raise.

Tough love by management will cause short term pain for existing shareholders but will set the foundation for future success.

My prior article, Advanced Cell Technology: A Key Patent Critique, created quite a buzz in Advanced Cell Technology (OTCQB:ACTC) investor circles. The article focused on ACTC's key patent #7,794,704 for hESC derived Retinal Pigment Epithelial Cells (RPE for short) for the treatment of Age-Related Macular Degeneration (AMD for short).

At time of issuance of the patent, ACTC described the patent in a press release as,

broadly directed to processes developed by ACT scientists for the production of retinal pigment epithelial (RPE) cells from human embryonic stem cells (hESCs). Issued with 35 claims, the patent covers what the company believes are the fundamental methods for producing RPE cells from hESCs in a manner that is suitable for use in human patients.

RPE is ACTC's main therapy platform and their AMD trial is in the final stages of a Phase 1 clinical trial, hopefully to be completed by year end. For the diehard shareholder, ACTC's IP is sacred ground, not to be questioned. But for investors researching the company, it's fair game and is very relevant to the future success of the company.

The reaction (and one could argue overreaction) to the article was due in part to timing. ACTC is running low on cash and management has indicated the need for a capital raise by the end of the quarter. Shareholders were also told during the recent conference call that interim trial data will not be press released as most had hoped but will most likely be presented in a top-tier peer-reviewed scientific journal, which takes time. Shareholders are naturally jittery.

Stating the obvious, when you're raising capital, the level of dilution is a function of the amount raised divided by the stock price. That's the reason companies usually try to time good news with capital raises. However, the negative to that approach is the company can lose credibility because the process of promotion brings in new shareholders and/or existing shareholders increase their positions ahead of the dilutive event. ACTC is balancing the competing goals of minimizing dilution while attempting to build credibility that has been severely eroded due to a history of malfeasance by prior management. The focus on credibility is very positive for the future of the company and as a potential investor, I applaud the effort. It truly is an inflection point in the management of the company, as I stated in my prior article, Advanced Cell Technology: A Balanced Perspective of Risk and Reward. But existing shareholders may make the ultimate sacrifice for that credibility for the benefit of future shareholders.

Splitting Hairs

If the loyal shareholder base is jumpy, it's easy to understand why. But, the world doesn't stand still while ACTC plans a capital raise. Successful investing is all about knowing the right time to enter an investment and the right time to exit or lighten your position. In that regard, analysis never rests.

A close look at ACTC's response is helpful in understanding their position as it relates to the key patent in question. But, before we do, it may be helpful to remind the reader of the issue at hand. The main dependent claim in the referenced RPE patent states:

culturing said human RPE cells selected in step [III] to form a cell monolayer containing cells that are Pax6-.

Pax6 is a protein that is encoded by the PAX6 gene. The gene is critical for the development of eyes and other sensory organs. When the protein is expressed it is Pax6-positive. If it isn't expressed, it is said to be Pax6-negative.

The confusing aspect of the claim is that it states "a cell monolayer containing cells that are Pax6-". However, a review of the scientific papers including the paper in the Lancet that highlighted the process clearly showed testing for Pax6-positive. The relevant section in the paper states,

Transient marker of neuroectoderm differentiation, Pax6, and RPE markets, RPE65, bestrophin, and MITF, were expressed at high levels. In mature cultures greater than 99% of the cells were positive for ZO-1 and bestrophin, PAX6, or both (PAX6 disappearing in more mature cells). After cypopreservation, cells were thawed and formulated for transplantation. Staining for PAX 6, MITF, or both was done on formulated RPE cultured overnight, confirming greater than 99% purity.

It would be helpful at this point to consider the company's response to my inquiry.

1. The claims in the issued US patent to which the article refers use the phrase "culturing said human RPE cells selected in step to form a cell monolayer containing cells that are Pax6- and bestrophin+ and exhibit a characteristic cobblestone, polygonal, epithelial-like appearance and comprise brown pigment dispersed within their cytoplasm".

2. The word "contains" means includes - but does not require that every cell be PAX6-. Rather, it covers a heterogeneous cell population with respect to Pax6 status.

3. PAX status of RPE cells changes as the cells mature. In suspension, RPE cells will gain PAX6 expression over time and will generally become PAX6+. However, in a monolayer of RPE cells which are "cobblestone, polygonal, epithelial-like appearance and comprise brown pigment", the cells are heterogeneous with respect to PAX6 status - some are positive and some are negative.

4. Neither Biotime nor anyone else engaged in the process of manufacturing RPE cells can avoid this heterogeneous culture as the monolayers are formed and mature during the process - those cultures will always "contain" Pax6- and bestrophin+ RPE cells.

The company also points out that in the Lancet paper staining for "PAX 6, MITF, or both" does not mean 99% positive for Pax6, which is illustrated in the paper in Figure 1C (MITF and PAX6 expression is shown together)".

The basis of the company's position is as cells mature they lose some PAX6 expression. So, technically the claim is correct. The claim may not correspond to the process for which the specification teaches as evidenced by the fact they are testing for PAX6-positive and not PAX6-negative. But, technically, those cells will "contain" some more mature Pax6-negative cells.

Identifying RPE

How did this ambiguity between the key RPE patent and the methods used come about in the first place. A thorough review of the application process provides some insight. The Examiner required an identifying characteristic for the RPE cells that distinguish RPE cells from other human cell types. Since the marker Pax6-positive is found in other cell types, a work-a-round led to the following:

A cell monolayer containing cells that are Pax6- and bestrophin+ and exhibit a characteristic cobblestone, polygonal, epithelial-like appearance and comprise brown pigment dispersed within their cytoplasm.

The statement matches the response quoted by the company and the declaration by Dr. Klimanshkaya, one of the lead scientists in the development of RPE at ACTC, which also states,

It was known in the art that human RPE cells could be positively identified and distinguished from other human cell types by the following characteristics: absence of Pax6 expression; presence of bestrophin; a characteristic cobblestone, polygonal epithelial-like appearance, and presence of brown pigment dispersed within the cells' cytoplasm.

So, the goal was to identify RPE cells with characteristics not found in other human cell types. A written response to the Examiner's requirements further states,

The supplemental declaration of Dr. Klimanshkaya further provides that selection of pigmented cells reproducibly resulted in cultures of human RPE cells which exhibit the recited characteristics (morphology and expression markers), and these characteristics are sufficient to distinguish human RPE cells from all other human cell types.

The question is does this distinction between identification of RPE cells from other human cell types as stated in the patent claim differ materially from the scientific methods used to identify RPE cells? My original article stated that a review of the key RPE patent led to the following conclusions:

  • Advanced Cell Technology's patent review leads to questions and potential concerns.
  • Advanced Cell Technology's patent claims vs. the scientific method used in their AMD trial appear contradictory.

After further review and discussions with the company, I stand by my article. Will this ambiguity around Pax6 create a material weakness in the patent that can be exploited by the competition? I've asked that specific question and I can say the competition believes that is the case. ACTC is quick to state there are many other RPE patents in various stages of the patent process that do not speak to Pax6. As we've seen from the five plus year application process for patent #7,794,704, the evolution of an approved patent has many twists and turns and to review those patents today would be premature. However, ACTC appears to realize the need to reinforce their key RPE patent with additional patents, and based on a review of their key patent, I tend to agree.

The Bottom Line

As stated in my previous articles, the AMD market is huge and the condition is a perfect candidate for regenerative medicine. The disease afflicts more than 30 million people worldwide, with no current medical treatments available to stop or reverse the progression of the disease, which eventually leads to blindness. The RPE cells support, protect, and provide nutrition for the light sensitive photoreceptors. As AMD progresses, RPE cells die off. Replacing the RPE cells with new ones is a natural solution, assuming the transplanted RPE cells survive. The first company that can bring a therapy to market and address this unmet medical need will have a clear advantage. A review of ACTC's key RPE patent is obviously relevant and the ambiguity previously discussed may leave a crack in the door for challenges down the road. However, bottom line, I don't see it affecting ACTC's progress or ability to ultimately commercialize their RPE replacement therapy assuming the pivotal trials demonstrate sufficient efficacy.


It is prudent for investors to "look under the hood", which includes a review of a biotech's IP as part of their due diligence. That review with ACTC led to questions and uncertainty around their key patent that supports their RPE platform. After careful consideration, in my opinion, the concerns that were identified around Pax6 may surface down the road but should not be a deciding factor when considering ACTC as an investment today.

That said, other factors will continue to keep me on the sidelines. ACTC's capital raise will be dilutive to existing shareholders. In addition, the settlement process with prior warrant holders is expected any day and the expected outcome is still uncertain. Lastly, ACTC's reporting of its trial data, which was the key catalyst for investing in the company, is now being delayed. ACTC continues to be on my watch list and with a fresh capital raise and the uncertainty of litigation behind it, sometime in the second half of the year, may be a good point for re-entry.

It's important to remind the reader that investing in developmental stage biotech is highly speculative and risky. The road to commercialization is long and full of peaks and valleys. Take profits when offered, and most importantly, diversify.

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.

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