Thursday, 12 January 2012 06:58

Reflections on Cytori- the years 2006-11

MacroPore was from an investors viewpoint- kind of "the dark side" of Cytori- not only because of the failed Medtronic partnership on bio-resorbable implants, but also because of excessive option-plans and failed guidances on revenues etc. The preceeding article "History" was a more objective article and facts driven- what follows is surely also "facts driven", but has definitely a more subjective colour, in view of unrealized potential of the technology that Cytori possesses ( Icall it the "regenerative goldmine"), which potential has not been monetized by the management by any reasonable measurement yardstick sofar- the least as per the present stock price at the end of 2011 of somewhere around 2$.


In 2007 I wrote a posting on the Yahoo board, which I called "reflections" of a long time shareholder. A critical assessment, which I believe Tom Baker said went around in the Cytori building and contained "some inaccuracies". What those inaccuracies were, I still dont know, but I macr buildingguess the general "drift" was accepted and probably understood, when I consider the actions taken afterwards in respect of Board composition and other things. I used this article and updated it, to what you might call "the reflections of the whole 11 year period that MacroPore/Cytori have been a listed Company- i.e. as of early 2012" from a personal investors viewpoint.

What one should realize for instance there has been a past before the Cytori stem cell days: a MacroPore past, which from a stock perspective only took place in Germany, where it was listed after the IPO in August 2000.

I increased my position in the company in early 2004 at prices, which were only somewhat higher than the present ones of early 2012. But than again there were only 14 mio shares in those days. The deciding fundamental factors at the time were:
1. realized sales of about 10 Mio in H2 of 2003 with 70% margins.
2. pick up of a nice bunch of cash of 15 Mio or so from the sale of SurgiWrap
3. forecast of 18 Mio for revenue in 2004 with further growth likely in future years and break-even for 2004 a distinct possibility.
4. added bonus for the then “interesting looking” stem cell development

The early investors were counting on the implants business- nothing to do with stem cells. What actually happened is known- many promises, but only non-delivery of promises due to a horrible contract with Medtronic. The time span of about 8-9 years which is normally required to develop a mature company business came to a conclusion in the summer of 2007 with the HydroSorb sale to Kensey Nash for a meager 3.4 Mio.

It was somewhat macabre to read in Schedule 14A for 2004 that the compensation committee (Rickey!) awarded all employees the same (full company) bonus for that disaster year in order to keep up moral. Of course there was no interest in the moral of the shareholder.
Talking about shareholders- in those disaster days, Calhoun, Cox and Rickey had awarded each other 200k, 135k & 50k annually in options, which was at the time, each year approx. 2,5-3% of outstanding float and of course, all at low prices because of non-performance.

Normally these options would have been rendered worthless, because of bankruptcy of MacroPore. The in 2002 acquired company StemSource and Marc Hedrick have blown “new life” in the future value of these options, which in my mind are worth a gigantic fortune- still as of today, although some will "hopefully" expire worthless in February 2012. (update Jan 2012- doesnt look like it though) 
No surprise therefore that Calhoun & Cox were selling some shares occasionally in case the bottom of their wallets was visiMarshall Coxble- they have “earned” plenty of them in the past.
Concluding remarks on the “pre-Cytori” days option policy- this was changed for management in 2004 from intergalactic- to more worldly and acceptable proportions. The Board however collected for another 3 years, up to 2007, cyberspace option rewards for meeting 4-5x a year. Again hardly any incentive for those guys to buy on the market like has been demanded by other users in different discussion boards- they got plenty for free.
As an add-on, a real “veteran-investor”, that is a guy that bought 750 shares at an over 18$ price at the IPO and who is still holding those shares today, mailed me an IPO summary powerpoint . Looking it the projected profits 2001-2004 compared to the actual achievements in the following years, I am not surprised that Marshall Cox-the long-time Chairman of the Board and father-in-law of Calhoun- dumped all of the 2 Mio shares of his VC organization (Saratoga Boys Club) and most of his own, within 6 months after the IPO. This person who was also employed as a full time “Board director” (have never come across any situation like that) and gave Calhoun “valuable” advice over 7 years, including 3 major CHANGES in strategic directions over the course of only 2 years, who-thank god- retired in April 2007. Part of the advice surely was to reduce risk- Calhoun took good note of that and reduced his ownership as co-founder of the company also from 731k (post-IPO still 5%) to very little at present-besides his options. No further comment appears required, except to note that although Sarbanes-Oxley legislation was passed already in 2002, in San Diego possible "conflicts of interest" were simply waived as "not relevant". 

No surprise therefore that I had only a token number of MacroPore shares left in my portfolio going into 2005. That changed later in that year though.

Learnings from this "period"

The decision to limit the distribution agreement with GE Healthcare to only 18 months at inception in 2008 was certainly inspired by the 12 year Medtronic salescontract which almost ruined the company because of non-performance.


Reading my writings in 2007 "Reflections" with hindsight now in 2012 two major olympus logothemes crop up, which as of to date have not been answered at all. One of these main themes was AND IS the secrecy around the Olympus relationship and secondly, the inability of management to monetize the tech in therapeutic partnerdeals.

Olympus has approx. 55 Mio$ invested DIRECTLY in Cytori since 2005 and at least the same amount of money in developing "Celution One". Still the Olympus-Cytori JV wont bring them much money in view of its set-up and structure. The economics thereof MAKE NO SENSE AT pipe 02_07ALL. The money is only on the therapeutic side, where Cytori collects everything in the future.

Surely the mystery will be solved sometime- Chris Calhoun had "a slip of the tongue" in the BioMedTV interview, where he stated that Cytori has succesfully treated fistula´s with Crohns disease. Officially -when I asked whether this was correct, I was told that as per "legal department this was a slip of the tongue- i.e. a mistake" However, this must come out of combined efforts from Olympus and Cytori, which have been kept secret. This part of the business is still a gigantic mystery to me, untill, yes untill the added claim on Celution for Fistula was reported. Obviously there is no doubt in my mind anylonger about things to come, but presently the chaos at Olympus after the financial scandal plays a major role too.

Second theme is the absence of therapeutic partnerdeals sofar- in late 2006 Cytori devoted an entire conference call to concerns from shareholders, which centered around cash (as always) and getting non-dilutive cash into the Company through partner deals. Two deals were promised for 2007- at the beginning now of 2012, we are still without one.

Just one single event brought me and several of my fellow international investors back or new into the stock. That event was in the summer of 2005- the pick up of 1,1 mio shares by Olympus at 10$ although the share price was 3-4$ at the time and stayed on the same level for a long time thereafter.
I never assumed Olympus was a charitable foundation, so the incredible premium must have had solid value reasons- certainly after doing due diligence for almost a year and closing the hardware deal a couple of months later.

Olympus´ due diligence inspired me to do my own and I spent a lot of time in those years (and still as of today) looking at stem cell science in general, IP issues, everything available on the web on ADRC´s and evaluating the business models of Cytori and all known present and future competitors. The result of that due diligence is simply, that in my mind there is no other business model in the stem cell sector and all other biologics spaces known to me, which is as compellingly simple, efficient and cost effective and at the same time addressing major markets for unmet needs with a strong (but not perfect) IP- portfolio. One cannot at the present time estimate its true value in 10 years time, other than saying, it could be gigantic, if the company is managed in the proper fashion. One can only applaud the thinking and execution of the employees at Cytori so far of the Celution based model using fresh autologous cells, whose plasticity and potency, based on the evidence available to me, are beyond any doubt.

Coming back to Olympus ; eveappl-partnersn if they didn’t exercise their option to buy more shares after the first round, which need if you like was negated by picking up 2 Mio shares from the summer 2006 share issue, the prices paid were still at a high premium over market, but at the same time more in line with sector development. If you take a look at the sector, STEM, ASTM, GERN, OSIR etc you will notice that the "hype and hope" valuation of 2005/6, at the time of the Olympus equity deal, was roughly 200% higher for all players compared to the present one, is gone and has turned into "prove it to me" wait and see approach by the market, despite encouraging clinical progress by all sector participants.

Now on top of that premium paid by Olympus for equity, one has heard thru-out the years that Olympus is spending several Mio a year on salaries of their employees in developing the technology and is probably laying out a lot more money for the construction of a building or building-extension in Nagano, together with putting together a assembly line, moulds for parts etc. All value created, that at a minimum benefits CYTX for 50%.

Again, Olympus is not a charitable foundation and looks to optimise value for stakeholders  and cannot achieve a meaningful contribution for its stakeholders by spending much money (read above) and only producing hardware i.e. Celution for Cytori, which is meant to be the razor in the razor-razorblade concept for marketing of the therapies. Meaning the return thereof will be minimal if any.
What is obviously much, much more important is the complementary synergy of stem cell technology to the business of Olympus itself. Next to the camera business, the endoscope business is the biggest revenue driver at Olympus (70% world market share) and obviously the fit is right there to deliver Celution cells with Olympus engineered delivery systems into theolympus-endoscopes intestinal tract of patients to sites of injury or disease.
This is going to be huge, no doubt about it. On top of the “undisclosed” = fistula application, which should have been tested in the clinic by now (update-approval in 2010), other companies like Cellerix in Spain have already proven the efficacy of treatment of fistula problems with and without Crohns disease with cultured ADRC´s through the IND pathway (>70% healing rate compared to 20% with standard of care), which also applies to the therapies of French Celogos with myoblasts for urinary incontinence. These tiny outfits obviously have a head start, but the favourable regulatory pathway (certainly in Europe) together with the Olympus delivery competence and marketing clout will certainly make them irrelevant.

This brings me to the next vastly underrated key aspect of the Cytori technology. That ADRC´s work extremely well for reperfusion of ischemic tissue, as pre-clinical results on large animals have delivered compelling evidence, which were much better than competing marrow sourced cells have ever delivered in similar settings. This is known and hard fact for heart, legs and neo-vascularisation of fat issue, basically useful in all parts of the body.
But the versatility is a lot more widespread in respect of wound healing (intestinal, body surface and infections of the mouth or lungs), orthopaedic applications for bone-and disk regeneration, immune system disorders (of which there are about 60) and organ regeneration, kidney, liver and yes even endocrine therapies look feasible, probably on a more attractive timeline compared to (partial) resolving of neurological disorders.

Basically an immensely broad platform technology is visible for the investors that want to see it. Several of those opportunities have apparently been tackled, but are kept “undisclosed” and basically are “waiting” for development with partners. We have been told that a few potential partners already have been turned down by Cytori for lack of “total” commitment for the technology. That certainly did not please anybody, but apparently we got the Green Hospital banking deal instead (2007) to keep the stakeholders happy, but which was a total desaster too as we know now.

Nonetheless, with the fact that CYTX will be the first stem cell player that will make some revenue from their technology already next year and has an incredibly broad pipeline on products, this stock under “present normal” conditions already should have a $15-20 price ticket right now-if the partners (maybe even just one) would be there to develop the platform.

“UPDATE 2012- Well- this time around, I decided to leave the rest of the article out of this write-up. Having become a little more mellow and having understanding for some difficult corporate conditions with the FDA. Thereto- decision time is approaching I believe in respect of partnering, which will make us all happy campers surely".


Last modified on Monday, 22 February 2016 02:09

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