As I have written so many times before, investments in speculative biotech companies are risky endeavors. These companies represent cutting edge technology, and they are the tip of the spear when it comes to our future in healthcare. Being on that tip means these entities are exploring new frontiers and going places that others fear to tread. One such bold and exciting frontier is the relatively new world of stem cells. It is here where I will make my stand with a company named Advanced Cell Technology.
Advanced Cell Technology (ACTC.OB) is a biotechnology company focused on the development and commercialization of human embryonic and adult stem cell technology in the field of regenerative medicine. Their main focus revolves around macular degeneration, which is an unmet medical need for the world worth well over $30 billion. ACTC has treated nine patients between their three ongoing trials. All of the patients are reported as doing remarkably well, and there have been no safety issues whatsoever. The most exciting thing to report is that the success rate is running at 100% for those treated. Obviously there is much more to the story, and if interested, then one should view the ACTC website and presentations for a greater understanding.
Reading SEC filings, listening to conference calls, and viewing corporate presentations provides a great deal of insight. But for some of us, that is not enough. Luckily Gary Rabin, Chairman and CEO of Advanced Cell Technology, was extremely generous with his time, granting me this interview to help answer some more questions. Below is the interview in its entirety.
Michael - Historically stem cell companies have had a tough time of it. In the past, Geron (NASDAQ:GERN) was the main focus with their stem cells being used in spinal cord trials. When they left the stem cell sector it left a huge gap. Do you think that ACTC has filled that gap?
Gary - I think that we have more than filled that gap. The Geron trial was a very complex project. The headlines on it were so beautiful with the reference to spinal cord injuries, and it sounded great. It was a very complex surgery with a difficult means of delivery. It was not even clear that the cells that were used were even the right cells for the job. To make matters worse there was not a huge indication. They were talking about 10,000 cases a year. Not to take anything away from the magnitude of how wonderful it would have been if this would have come to market, but the disease set we are going after is potentially in the millions of cases. This is a disease (macular degeneration) that touches everyone's lives. If we are successful, the impact on our healthcare system and number of lives is so much bigger in comparison.
Michael - Recently a bipartisan bill was passed known as the Food and Drug Administration Safety and Innovation Act. In this act there is a provision where the FDA can break through the bureaucratic roadblocks and speed up the process of approving promising treatments. Do you see this having any impact on ACTC's current macular degeneration trials?
Gary - Due to the fact that macular degeneration is an unmet medical need, we already had some built-in potential advantages in the timing and size of our trials. I don't think it is going to make much of a difference, but certainly anything that can help the FDA streamline the approval process is positive. I think the FDA is right to put us through our paces in terms of making sure that our stem cells are safe. An abundance of caution when working with new technology is important. Once you have proven the cells are safe and there is efficacy, then a streamlined process to bring products to market will be advantageous. First it helps people impacted by these diseases, but shortening the amount of time and decreasing red tape should help make these cutting-edge treatments less expensive and more accessible.
There are great costs in conducting these trials required by the FDA. Anything that can be done to streamline the process will help reduce the costs. Our cell therapy is an off the shelf kind of therapy. Our marginal cost of goods sold when we get to clinical dosages is not likely to be very high. The reimbursement that we would need to get for this therapy is relatively high compared to something you could buy out of a bottle, because of all the time and money we had to invest in getting the product to market. Streamlining will reduce the costs and help cut the burden to the healthcare system. If successful, our therapy running at a cost of $5,000 or $10,000 per eye would be much cheaper when compared to the current cost of macular degeneration which can run into the hundreds of thousands. We would be saving a significant amount of money for the healthcare system. Anything that can be done to ease the transition would be beneficial.
Michael - Stem cells and regenerative medicine have been getting lots of press lately. Companies like Osiris Therapeutics (NASDAQ:OSIR), Aastrom Biosciences (ASTM), StemCells Inc. (STEM) also seem to be moving forward at breakneck speed on their products. Do you feel these companies are in direct competition with ACTC? What sets ACTC apart from all the other stem cell companies?
Gary - Stem cells have the potential to create any kind of tissue in the body. We are talking about limitless numbers of opportunities. I really don't see companies running over each other in their freedom to operate. STEM is targeting macular degeneration with a different kind of cell than us. They are injecting a massive amount of cells, but these cells are not the precise cell that is affected by the disease. When you think about what impact that might have on people, then you know the FDA will be looking closely.
If our therapy shows efficacy, it will be very hard for any other kind of therapy to compete. Our therapy is a simple replacement of cells that are identical to the damaged ones. I am not saying that there are not other things that STEM's technology might have benefits for, but I don't really see in any way that their therapy will be competitive to our therapy. Of course this is based upon the extent that our therapy works. Obviously if our therapy does not work then you would have to take a more complicated approach, with theirs being an example.
One of the beauties of our cells is that they are replacing the actual cell that is the cause of the disease. It's a simple surgery and a very mild number of cells so the effect on the body is very small. This mitigates issues like not knowing where these cells might migrate to. Our therapy, to the extent that it works, should have no competitive issues. I think Osiris, Aastrom, and StemCells are innovative companies and are going after great target markets. There is lots of room for everyone to operate.
One thing you have to remember is this; let's just say, in a hypothetical future scenario, that our product is approved. Then let's say we get 1% penetration of the 50 million people in developed markets today that have macular degeneration. Finally let's say we charge $10,000 per therapy. When that comes together it equals $5 billion per year, and that is just 1%. We are talking about enormous markets here and there is lots of room for everyone.
Michael - You have said on several occasions that it was not likely a matter of whether ACTC will partner one or more of the programs, but rather when. Can you give us any indication on how this is going in relation to the potential Chinese joint venture, plus others that have been alluded to?
Gary - Let's talk about China first. Right now in China there is a challenging regulatory environment. If that regulatory environment changes in the future, then a joint venture could be something that is easy to do. It is no secret that we have been talking to three potential partners in China. One of these potential future partners has continued to talk about the potential to have a joint venture to this day.
Before that, though, we need to do two important things. First we need to make sure we choose the right partner. The three potential partners we are talking to are some of the most prestigious ophthalmological institutions in China.
Second, we have to make sure we are protecting our intellectual property. This is a two-fold item. First we need to protect it from piracy. If we did a partnership in China, Chinese policy would require us to manufacture the cells in China and that is a potential risk for us. In the early going we proposed to manufacture the cells in the U.S. and ship them to China. Once we proved effectiveness we would be willing to make the commitment to build a manufacturing facility in China with our partner. That was the basic deal structure we were talking about. This is not currently allowed under Chinese law, so you could imagine why we would not want to do a significant technology transfer to China.
The second item to consider is that China is a huge market for age-related macular degeneration (AMD) and myopic macular dystrophy, which is another area we are interested in. China is a huge market, and the one thing we don't want to do is ruin a potential worldwide joint venture by giving up on developing a treatment representing one of the world's largest potential bio-pharma market opportunities. We need to balance this with what we might do in our current retinal pigment epithelium (RPE) program. We have to make sure to be able to fold it into our worldwide rights program. So if we were to enter into a joint venture with a large pharmaceutical firm we would not want to forego the opportunity to engage with the Chinese market.
Michael - How about the potential partners other than the China JV?
Gary - I could do a partnership today without question. It's like anytime you run an auction for anything, you want to make sure you have the most potential parties at the table. You want them to have the most information so that you can have a really effective bidding environment for the product. You want the most buyers in the market. The education process for these big pharma companies runs at different paces. Some firms that are interested are moving very slowly and methodically as you would expect of big pharma. Some tend to move faster. I want to make sure we have a good number of people who have done a good amount of work who understand the issues. I don't want to work with a market of just 1, 2, or 3. The number of global pharma and biotech companies that have interest in this particular disease is a significant number.
There is a bias in large cap pharma against paying upfront cash for companies that are in Phase 1. ACT has some mitigating circumstances, though. We have this huge disease indication we are going after, and a patient population that looks amazing. Our second U.K. Stargardt's Macular Dystrophy (SMD) patient after just three weeks is already picking out multiple letters on the eye chart. This thing is working. We have to make sure we are educating as many potential partners as we can. We have to show them that normally when you are in Phase 1 you are in a safety phase, but, "Look at the efficacy data we have demonstrated." This is not only in our human studies but also in our animal ones as well. Think about the kinds of patients we are treating given the very late stages of the disease that they are in. We want to make sure to eliminate some of that "cultural bias" involved with those big upfront payments. If we can't accomplish this, then we can wait until the end of phase 1 or into phase 2.
This company has so many opportunities and we have to make sure we don't take what could potentially be one of the biggest therapies in the world and give it away. It's conceivable that we could potentially even pass Lipitor one day as the biggest revenue-generating therapy/medication of all time. We have got to make sure we don't give it away for too little. We put in a very strong board of directors to help us make decisions. We got all the investment bankers that do these kinds of partnership arrangements. All are very interested and they are all looking at this. Everyone knows our objectives, which is not to get $10-$15 million upfront for the program, and in so doing, throw away a huge amount on the back end. We won't do that, it would be crazy. If we can find a really good partner for us and our shareholders, then we will do it.
Michael - ACTC has treated nine patients between the three ongoing macular degeneration trials. There have been no safety issues whatsoever, but what is remarkable is that the patients are responding to treatment. Basically there has been a 100% success rate and the stories that are coming out are jaw-dropping. Have these results generated any excitement with your potential partners?
Gary - First, these nine people were individuals whom we thought we were not going to have any impact on their visual acuity. The answer to your question is of course, but one must remember that it is only nine patients. Fast forward a few months and those numbers will escalate. Now that we have multiple centers online we are hoping to move relatively quickly to a more meaningful number.
To be honest the number of patients that we have treated so far is not really enough of a critical mass for big pharma. Big pharma is just as interested in the preclinical work in the animals as they are in the work being done in the human clinical trials. There are only seven patients that have been treated for long enough to have had any meaningful impact, although the eighth patient in the U.K is starting to show some results. At some point the power of the human patients will weigh more heavily. Everyone is very interested in the data, but the number of patients that have multiple months out since injection was very small, until very recently. Right now there are not that many patients to look at, so big pharma is asking about the animal studies while they wait for the human studies. The cutover is not that far away.
Michael - To use a poker metaphor, this must seem like the ultimate hand you have been dealt. You are competing against a dwindling cash reserve for the company and various would-be partners. ACTC does not want to leave any cash on the table, but in the end something will have to give.
Gary - First let me say this, we have not finalized our finance plan. In the context of our reverse split and the planned up-listing to the Nasdaq, doing a fully-marketed straight equity deal underwritten by an investment bank is a possibility. There is no question that we could do a deal like that. This would look nothing like the old toxic type of financing that was done in the past. Obviously potential partnerships both in China and in big pharma are also potential sources of capital.
Looking at our burn rate, cash on hand, and financing lines we are funded into the third quarter or maybe early fourth quarter of next year. We have some time to raise capital, but we don't have a lot of time. What we never want to do is what this company has done in the past, that is to wait until you are out of money and then go out and try to raise more. It creates an overhang on you that you can't get out of. It put a gun to the head of the company every time we did one of the financing deals in the past. We will never do that again. We will make decisions about whether we want to partner in Phase 1, partner in China, or do an equity deal by sometime later this year or early next. It won't look like any of those past dilutive financings or warrants. We are out of that business.
Michael - When it comes to the planned reverse split in conjunction with the up-listing to the Nasdaq, can you see where the split might not happen? Or could it be possible that the split ratio could be well under the minimum 1-20 amount that was voted on?
Gary - I see no way that this can happen. With over 2 billion shares outstanding we can never get a listing onto the Nasdaq unless we were really close to commercialization. There has to be a reverse split. Do I think the stock should be trading much higher right now? The answer is of course. Do I think that with a $160 million market cap, the stock is one of the most disproportionate risk reward scenarios I have ever seen? The answer is yes.
We are unlikely to get to a billion dollar valuation by just continuing to treat patients. Maybe with a joint venture partner and a big upfront payment, while actively pursuing our blood, MSC opportunities we could maybe get there. By the way, on those new programs, watch this space as we have lots of exciting things happening. When you look at companies in the biotech world that have billion-dollar market caps, they are much closer to commercialization than we are. We have to be cognizant of absolute valuations here.
Michael - ACTC's RPE program and macular degeneration potential is huge with a $25 to $30 billion market potential in the US and Europe. What other people fail to realize is that waiting in the wings is ACTC's other potential in the form of stem cell derived blood products and Mesenchymal Stem Cells (MSCs). Do you have any idea as to when we might see these programs get off the ground and into clinical trials?
Gary - Let me give you one example. We have done this experiment in autoimmune encephalitis in mice. It's a mouse model for Multiple Sclerosis where you inject a specific kind of protein into the mice. Basically what happens is in 10 to 14 days you get complete front limb paralysis and partial hind limb paralysis. On a scale from 1 to 5 to the degrees of paralysis these animals get to about a 3.5. There currently is a drug on the market call Copaxone by Teva Pharmaceutical (NYSE:TEVA). This year Copaxone will be a $3.8 billion drug. Copaxone gets the mice down to a 1.5 on the autoimmune encephalitis scale. Adult stem cell-generated MSCs get the number down from a 3.5 to 3.25. Our MSCs get it down to 0.5, so we are a full point better on the animal scale than Copaxone which a $3.8 billion drug. So how quickly are we working on getting these things into limelight visibility? The answer is as quickly as we can.
Obviously we have to make sure we maintain focus on our macular degeneration programs. We cannot drop the ball there. Until we have a big slug of capital come in, we have to be careful how we fund this. We are considering partnering programs in some of these autoimmune diseases to go after some indications that could help fund some of this stuff. It would be foolhardy for us to take our eye off the ball of the RPE program when you look at the unbelievable results that we have had. We are balancing our excitement for this product with the limitations of human and financial resources. Keep your eye on this space as we have lots of really big indications that we can go after.
First, I would like to thank Mr. Rabin for taking the time to participate in this interview. He answered every question in a thoughtful manner and was very generous in his time. Finally, I would like to make it clear that I was not compensated by ACTC or any of their associates to compose this article. I am a simple shareholder in this company, a contributor to Seeking Alpha, and nothing more. My intent here is straightforward, and that is to get as much information as I can for myself and those interested in this company. As time moves forward I will continue to publish articles on ACTC and other companies that I feel might be winners for investors. As always, thanks for those of you who took the time to read this article and interview.
Disclosure: I am long ACTC.OB.