http://www.zacks.com/stock/news/21588/Cytori
Cytori's IP and Cash Position Solid June 29, 2009
Two concerns for investors in Cytori Therapeutics (CYTX - Analyst Report) have been the intellectual property (IP) and the cash position. We believe both are solid, and should not prohibit investment in the name at the current stock price.
Intellectual property has been a concern for investors ever since the summer of 2008 when the U.S. District Court in California removed The University of California from USPTO # 6,777,231, a patient licensed from Cal to Cytori which covers isolated adipose-derived stem cells. However, since that time, management has vigorously worked to protect its ability to isolate adipose-derived stem cells and sell the Celution System. And despite the loss of the '231 patent at Cal, Cytori has half a dozen other active patents protecting the Celution System, which includes 5 different device components or reagents.
In June 2008, Cytori received Notification of Issuance from the United States Patent & Trademark Office for its core patent covering the Celution System (USPTO # 7,390,484). This patent protects Cytori's key device technology, which processes adult stem and regenerative cells from adipose tissue at the patient's bedside.
The U.S. '484 patent is a central part of Cytori's global patent portfolio, which includes more than 150 pending patent applications worldwide, including in key international areas of Korea, Singapore, Australia, South Africa, and Japan. Listed within the patent are protection for the device, the single use consumerable, the proprietary reagents, and the harvest of adipose tissue via liposuction or lipectomy.
In January 2009, Cytori announced it had received USPTO # 7,473,420, which protects important formulations of the Celution System output. The '420 patient builds upon the '484 patent discussed above, issued in June 2008. Specifically, this new patent covers methods to combine the Celution System output with additives, such as scaffolds, matrices, or other agents to increase therapeutic effect, optimize or localize cell delivery, enhance specific cell properties or promote cell differentiation.
Additional patents pending include: USPTO # 7,514,075, which further builds upon the protection for the Celution device, the reagents, and the single use consumerable, as well as the user interface. USPTO # 7,429,488 protects the method for cosmetic and reconstructive surgery, and USPTO # 7,501,115 protects the method for cell banking.
Finally, we noted above Cytori's un-disclosed alliance with a pharmaceutical partner for the manufacturing, packaging, and quality-control on the Celase enzyme solution that is part of the entire system. The proprietary enzyme acts as a chemical scissor that has optimized to digest and break down tissue to release the clinically relevant stem regenerative cells. Management also adds growth factors and other washing agents to the process that, in total, significantly work to increase the barrier of entry for alterative stand-alone harvesting units.
In March 2009, management entered into definitive agreements to raise $10 million, before fees and expenses, through the sale of 4.77 million units, with each unit consisting of one share of common stock and 1.4 warrants, at a purchase price of $2.10 per unit. The warrants, which will represent the right to acquire up to an additional 6.68 million shares of common stock, will be exercisable beginning 6 months after the closing of the transaction at an exercise price of $2.59 per share. The warrants expire 5 years after the date the warrants are first exercisable.
In May 2009, Cytori entered into another definitive agreement to raise $4.2 million through a private placement with selective investors, through the sales of 1.86 million units at a purchase price of $2.28 per unit. Each unit consists of one unregistered share of common stock and 1.75 warrants. The warrants will be exercisable immediately after the closing of the transaction at an exercise price of $2.62 per share and have a 5-year term.
In June 2009, Cytori Therapeutics entered into an equity agreement with Seaside 88, LP, whereby Seaside has committed to purchase up to 7.15 million shares of Cytori common stock in a series of 26 transactions scheduled for every 2 weeks at 0.275 million shares per transaction. The first transaction closed on June 22, 2009 and provided net proceeds of approximately $0.852 million. Cytori has the right to discontinue the agreement between the 13th and 14th closings, based on the company's assessment of its financing needs at that time.
The purchase price for all closings executed under the agreement is determined by applying a 13% discount to a volume-weighted-average price (VWAP) of Cytori's common stock for the 10 trading days preceding each closing date. The scheduled closings will not take place if the VWAP for the 10 preceding trading days is less than $2.50.
Cytori exited the first quarter 2009 with $15.5 million in cash and investments. We estimate cash on hand at the end of the second quarter will be approximately $25 million. Although the dilution is disappointing, we note that the current cash balance should now be enough to fund operations through year-end 2010. We think that Cytori's financial position will continue to improve over the next several quarters as cash burn is reduced (guidance is for burn to drop by $1 to $1.5 million per quarter by year-end 2009) and revenues increase.
We continue to be positive on the name and recommend purchase up to $8 per share.