Cytori Therapeutics, Inc. Buy
(CYTX – NASDAQ – $3.23)
Cytori Quarterly Update and 2014 Outlook
Ø Cytori reported total revenues for the full year of $12.2 million. For 4Q, product revenues were below our expectations at $2.7M (we had expected a year-end ramp of $7M); however, we note that product revenues excluded $3.6 million in shipments to customers in 2013, which are expected to be recognized as revenue in 2014. Cytori ended the year with $15.5 million of cash and cash equivalents and $4.2 million in accounts receivable. In January 2014, Cytori received an additional $9 million upon completion of the second closing of the previously announced Lorem Vascular stock purchase agreement. With a potential BARDA award pending and clinical trials now enrolling, we believe 2014 could be a major year of transition for the company. Please see our comments on the next page.
2013 and Year-To-Date Highlights: (from Cytori):
o Activated enrollment in all eight ATHENA sites and first ATHENA II site
o Achieved all three planned contract milestones related to BARDA contract
o Achieved FDA Investigational Device Exemption (IDE) approval for a hamstring injury clinical trial
o Received Intravase CE Mark approval to enable vascular use in the EU
o Received marketing approvals for the Celution System in Australia, Serbia, and Singapore
o Divested non-core Puregraft product for $5 million upfront and up to $10 million in future royalties
o Formed commercialization partnership with Lorem Vascular
o Refinanced term loan to extend maturity to 2017
2014 Operating Goals: (from Cytori):
o Complete ATHENA enrollment and make substantial enrollment progress in ATHENA II (both trials have begun)
o Publish long-term outcomes from European PRECISE trial
o Advance BARDA contract into the next phases, including a U.S. feasibility trial and expanded research and development
o Achieve approval for the Celution System in China
o Grow research product sales in existing and new markets through new partnerships and recent changes in Japanese regenerative medicine law
Ø Valuation. Basing the valuation on our assumptions in CMI (we expect 2020 EPS of $11.04) and discounting back at 30% yields a $10 price target.
A Few Key Points that Investors Should Consider:
1. Cytori raised $24 million at $3.00 a share (a significant premium) last year—a good raise that has other benefits. Cytori’s revenue line should build now as a result of the Lorem partnership, and this build should help finance the clinical programs, which we ultimately see as the principal value driver for the company.
2. The timeline for ATHENA is now on track. Based on our discussions with the direct managers responsible for the sites, we believe the company is executing a great phase II trial that can be used to leverage into a pivotal trial. All eight sites are screening patients, and the 23rd patient has now been enrolled (it’s approximately halfway completed). Enrollment could complete by Q2/Q3-2013. Top-line data could arrive in early 2015. ATHENA II has already begun enrolling patients in parallel with ATHENA I, keeping the momentum going and paving the way for a pivotal program for the company.
We remain focused on ATHENA as the principal driver. Recall that ATHENA I is an N=45 PII study at eight centers, most of which are now up and running. ATHENA II has also begun to enroll an additional 45 patients (high dose) at 10 centers. ATHENA I is expected to complete enrollment by this summer. Critical for investors to understand is that Cytori still has certain strategic advantages in the race (based on the regulatory pathway and what will be determined as the acceptable endpoints for the trial) to be the first approved cell therapy for cardiovascular disease, although the window is closing. We are excited to watch the progress.
ATHENA: Designed to optimize the path towards approval. Endpoints that might be possible in a pivotal program could include functional QOL endpoints (versus mortality and rehospitalization trial endpoints). This would translate into faster, smaller trials and a quicker path to market. We believe this is a direct result of the unique device pathway that Cytori is pursuing, which is not an option for competitors in this space.
3. BARDA: Cytori has met its three key milestones and submitted to BARDA. These include the development/validation of a next generation system, demonstrating that exposed patients (burns and radiation) can supply cells (their own cells) and show efficacy in the target indication (burn repair). The next tranche of revenues from BARDA could equal $56M and, as such, would be transformative for the company, but we recognize that much of the funds will go to pay for clinical work.
4. Sports medicine: The RECOVER trial. Cytori is now FDA approved to expand the RECOVER trial to a multi-dose, multi-center, double-blind, placebo-controlled trial. Cytori’s RECOVER trial will evaluate patients with Grade II tears of the hamstring muscle. RECOVER will initially enroll 10 patients in the United States. The first 10 patients will be given one of two doses of cell therapy (open-label), with the first five patients receiving the lower dose and the second five patients receiving the higher dose. Once the safety and feasibility of administering the therapy is confirmed in the first 10 patients (Part A), Cytori has the option to expand RECOVER to include an additional 60 patients in the multi-center, double-blind, placebo-controlled phase of the trial (Part B). The 60 patients would be divided into three groups of 20 patients. Patients in the three groups will receive a lower dose, a higher dose, or the placebo. The study will assess safety and tolerability and evaluate the effect of the cells on how fast the muscle tear heals (ultrasound and MRI), muscle strength, muscle function, and pain. The timeline to complete the first phase of the study will be provided once the trial is initiated and Cytori is able to forecast enrollment.
5. The competitive landscape is actually helping. Only one competitor has begun a phase III trial in the cardiovascular space (but that trial is large and should take some time—two or more years—to enroll), so the gap between PII and PIII has not widened while ATHENA was delayed. Again, the delay may actually be okay, as we believe it is a result of Cytori carefully planning and building the infrastructure to run a larger pivotal program.
6. Japan is coming. Having operated in Japan for a decade, we believe that Cytori has ideal positioning to capture what may be one of the largest opportunities in the cell therapy space as fast-track regulations emerge that may allow therapeutic approval’s based on a single modestly powered trial.
7. China too: Lorem will also be in a position to open up China, Singapore, and Australia.
8. Good data in the cell therapy landscape could trigger a gold rush. A wide range of data results and related clinic events should play out over the coming year. These include: Proof-of-concept studies in stroke and ulcerative colitis are coming up on results from three Phase II trials. Four pivotal trials in GvHD, CHF, DDD, and fusion are set to begin. Other trials in exciting areas such as AMD and spinal paralysis should complete enrollment and may have top-line data in 2014.
We believe the net result will be for investors to begin to ask: If this company has good data, what else exists in the space?