On June 14, 2019, I published "The Stem Cell Triple Play: 3 Companies With Great Value Drivers". Given how out of favor the stem cell sector has been for many years, I was surprised by the massive interest that this article generated. Given this unexpected level of interest and some compelling updates from the companies involved, I thought it would be a good time to provide an update on recent developments on this Stem Cell Triple Play portfolio and how these developments continue to validate the regenerative medicine space and provide the potential for future upside.
First, a look at the performance of each of the three companies, Avita Medical (AVMXY), Athersys (NASDAQ:ATHX), and Cynata Therapeutics (OTC:CYYNF). It should be noted that, among the three, only Athersys has any Wall Street research coverage in the U.S. Also note that the CYYNF shares on the U.S. market have no liquidity, so share prices in this chart reflect trading on the Australian Stock Exchange in Australian dollars under the ticker symbol CYP. All other numbers in the chart have been converted to U.S. dollars where necessary.
In general, over the three months since the original article came out, Avita Medical and Cynata Therapeutics have seen important developments while Athersys has been in a holding mode awaiting important readouts out of Japan. The following is a closer look at what has been happening in the last three months.
Avita Medical led that pack with an impressive 55% gain over the period and rightfully so. It has continued to release data that shows the versatility, safety, and efficacy of its elegantly simple RECELL system for treating burn wounds, skin injuries, and other skin disorders. In my initial article on the company back in February, I referred to it as the better mousetrap and that description certainly seems to be playing out. The shares were trading at just $1.90 before that article was published. I will focus on a few developments and observations over the last three months that help explain the outperformance.
FDA grants IDE on Soft Tissue Reconstruction Skin Wounds
The biggest news from Avita is the recent announcement that the FDA has approved Avita's Investigational Device Exemption application to conduct a pivotal trial evaluating the safety and effectiveness of the RECELL® System in combination with meshed autografting for the treatment of acute full-thickness skin defects, such as degloving (a type of injury where the skin is ripped from the underlying tissue), crush wounds (a break in the external surface of the body), abrasions, lacerations, and surgical wounds. This will be a 65-patient trial where each patient will be his or her own control, with one wound being treated with a fine mist of autologous cells derived from the RECELL system and an untreated control wound on the same patient. The beauty of technology platform is that safety has been confirmed and Avita moves directly to a pivotal trial with most new indications. Logic dictates that there is a high probability that data from this trial will result in approval and substantially expand RECELL's market penetration.
Study on Acne Scarring
Another very encouraging piece of news highlighting the versatility of the RECELL platform is a recent study published in Aesthetic Plastic Surgery on August 26th using RECELL to treat patient acne scars. Once again, the data is strong with impressive p values indicating efficacy:
The study revealed a significant difference in healing time (P < 0.001) between patients treated with dermabrasion (Group 1) and patients treated with ReCell® autologous regeneration techniques combined with dermabrasion (Group 2). The average healing time of Group 1 was 12.30 ± 1.725 days, while the average healing time of Group 2 was 5.27 ± 1.086 days. In Group 2, patient self-evaluation and third-party evaluation were more satisfactory than those of Group 1 (P < 0.001). Moreover, there were no postoperative complications in Group 2 such as pigmentation and scar hyperplasia.
The company recently added a new slide to its presentation that quantifies its current opportunities:
NASDAQ Listing Application
On July 19, 2019, Avita submitted a confidential registration statement with the SEC as a first step to listing its ADRs on the NASDAQ. On September 19, Form 20-F was filed with the SEC. I can't estimate the timeline on this, but a NASDAQ listing will open the shares to a wider audience of potential investors. Right now, the shares trade on the over-the-counter market which limits its availability at many big bracket investment banks.
Looming Hockey Stick Sales Ramp Up?
There has been much excitement at burn centers that can be evidenced by some of the recent news stories on the RECELL system. Here are a few:
Furthermore, the following slide illustrates the company's success in penetrating its initial market in patient burns:
It's hard to say when we see a hockey stick like ramp up in sales, but all indications are that Avita is going in that direction. With 90% projected gross profit margins at scale (Avita owns its own manufacturing facilities), it is understandable that the shares have continued to move up with the good news. However, I would caution investors to keep an eye on the market cap which is now substantially higher than when I first brought this idea to Seeking Alpha. As I was finishing up this article, Mallinckrodt plc (MNK) released positive top-line results from a pivotal Phase III Clinical Trial of StrataGraft Regenerative Tissue for patients with deep partial-thickness thermal burns, yet another validation of the regenerative space. However, this is an engineered product and is likely to be much more costly than the elegantly simple RECELL system that already has a meaningful head start in the burn market and a stark pricing advantage over competitive products already in the market, based on this recent analysis provided by Avita on current competitors:
Source: Avita Medical 8/19/19 Presentation.
My only issue with Avita is that since its former CFO left the company to move back to NY, I have been unable to get any response from anyone at investor relations through their investor relations contact form. I know these guys and gals at Avita have been busy, but investor relations is an important function at a public company.
Obscure Australian and thinly-traded Cynata has had an eventful few months and a couple of trading halts since I included it in my Stem Cell Triple Play and shares have advanced 31% in three months. What attracted me to this company is its unique Cymerus manufacturing platform that allows it to manufacture an unlimited supply of mesenchymal stem cells from a single donor through the use of a proprietary induced pluripotent stem cell technology licensed from the University of Wisconsin-Madison's Wisconsin Alumni Research Foundation (WARF). An explanation of the technology can be found here.
The first trading halt came in mid-July and ended after the company announced it was in talks to be acquired:
…Cynata confirms that it has received an indicative, non-binding and conditional proposal from Sumitomo Dainippon Pharma Co., Ltd ("Sumitomo") regarding a possible acquisition of all of the shares in Cynata at a price of A$2.00 per share in cash by way of a scheme of arrangement (the "Proposal"). Following receipt of the Proposal, the Cynata Board decided to grant non-exclusive due diligence access to Sumitomo, during which time Cynata has also continued engagement with certain other parties in relation to making a proposal. Cynata's discussions with such other parties have ceased. The negotiations between Cynata and Sumitomo are incomplete and any entry by the parties into binding transaction documents remains subject to a number of conditions, including (without limitation) the completion of due diligence by Sumitomo and agreement on terms by the parties. There is no certainty that an agreement will be reached or that the Proposal will be implemented.
A month later, Cynata updated shareholders on the situation:
…Cynata wishes to advise that it is continuing to engage with Sumitomo on a non-exclusive basis in order to determine whether the parties can agree terms for a final proposal and enter into a binding definitive agreement to implement a scheme of arrangement. The Cynata Board will keep the market informed of any material developments in accordance with its continuous disclosure requirements. Cynata shareholders should note that there is no certainty that Cynata and Sumitomo will enter into a definitive agreement or that any transaction will be implemented, and Cynata shareholders do not need to take any action at this point in time.
As these talks regarding a potential A$2.00 offer continue to play out, Cynata received the significant news that Fujifilm has exercised its option for a therapy to develop Graft versus Host Disease:
Cynata will receive a US$3,000,000 upfront fee from Fujifilm which is not included in my summary chart above. Cynata will also potentially receive additional future milestone payments from Fujifilm totaling up to US$43,000,000 based upon successful attainment of certain industry standard product development and commercial milestones, the first of which is US$2,000,000 on completion of the first Phase 2 clinical trial in USA, UK, or Japan. Subsequent milestones are completion of Phase 3 clinical trials (US$3,000,000), submission of applications for regulatory approvals (US$12,000,000), acceptance of geographic marketing authorizations and first sales (US$16,000,000), and extending the indication (US$10,000,000). Cynata will receive a 10% royalty on all future product sales if the licensed product is successfully commercialized in any country in which any licensed patents are granted or pending. Cynata will be required to make a one-off cash payment to WARF of US$10,000. Cynata is also required to pay WARF a mid-single digit percentage royalty on Fujifilm product sales and 30% of other amounts received from Fujifilm, including in respect of milestone payments.
The significance of this move by Fujifilm is that it further validates the Cymerus platform. Having spoken to CEO Ross McDonald years ago when Cynata first came across my radar screen, I know that Cymerus validation was critical to his strategic plan for Cynata and he considered GvHD to be a low hanging fruit. He was correct. This move by Fujifilm can only help in Cynata's discussions with Sumitomo Dainippon Pharma Co., Ltd. as the shares still have 26.5% upside from the current price of $A1.58 to the $A2.00 potential offer which, of course, may or may not come to fruition.
Athersys has been the underperformer of the three so far falling 16% since the original article. Athersys is awaiting results from Japan for clinical trials being executed by Healios in Acute Ischemic Stroke and Acute Respiratory Distress Syndrome (ARDS). These are the earliest major potential known catalysts and at least one, if not both, of these trials is likely to be completed before the completion of enrollment of the Phase III stroke trial in the U.S. being run by Athersys. For those unfamiliar with the Regenerative Medicine framework in Japan, Healios is required to demonstrate safety and show signs of efficacy for a regenerative medicine to gain "conditional approval" and gain reimbursement by the Japanese health care system for up to 7 years. This is a very low bar compared to the U.S. Of course, strong data would lead to full approval and that is the goal for Healios.
Within the next month or so, there should be a read-out on 365-day data from the Phase II ARDS trial for which Athersys released promising 28-day data on 1/23/19. Since the last piece of patient data for the 28-day results was collected during September 2018 according to clinicaltrials.gov, we should be coming up soon to an announcement. As a reminder, one-year results from the Phase II ischemic stroke clinical trial were very robust and improved significantly over the 90-day results. It seems that MultiStem provides long-term benefits to acute injury.
In the meantime, Athersys may have been gradually selling shares under an "at the market" equity facility it has with Aspire Capital and/or an open market sales agreement with Jefferies LLC in order to maintain a healthy cash balance, an important corporate goal. Combined with the lack of news over the last few months and the June 27th decision by Healios not to exercise its China option as it was originally negotiated, it is not surprising to see its shares lag the others (-11.4%) since the 6/14/19 publication of the article. However, I remain positive on the company and it is currently my biggest holding of the three companies in the Stem Cell Triple Play.
As Meatloaf sang decades ago in a beautiful ballad- "now don't be sad 'cause two out of three ain't bad". One can only hope that it will be three out of three before year end with strong upcoming 365-day ARDS data.
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Disclosure: I am/we are long ATHS AVMXY CYP:AU. 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: These are the personal views of Wall Street Titan Research and should not be relied upon for your investment decisions. All investors should always do their own due diligence.