We write from time to time about the difficulty of raising capital in small and micro cap stem cell companies. This difficulty is especially true in the current economic environment. Advanced Cell Technology (ACT), like some of our other Sector Companies including Geron and Osiris Therapeutics, began by using investor capital to do basic research.
As a business plan, the patent and license business model followed by ACT is always vague and undefined simply because the company does not know where the research will lead or how soon it will get there. This is particularly so in a nascent industry without existing products or product applications except in very specific and established areas that are not particularly sexy to new entrants (reference here is to the use of bone marrow transplants to cure various blood cancers. Stem cells have for years been the principle players in bone marrow transplants.)
The development of embryonic stem cell lines in 1998 and the demonstration of induced pluripotency in 2007 have been and are the driving forces for most of the new investment in the profit making side of what will eventually be referred to collectively as regenerative medicine.
Burning investor capital through the research phase is expensive enough. But in some business models that call for moving beyond patent and license and into off-the-shelf products for therapeutical use, you not only have to survive through product development but you've got to finance clinical trials up to and through phase III in order to obtain FDA approval. This requires very patient investors with very deep pockets or a very optimistic public market place in which to issue and sell additional securities. Both are in short supply in this financial environment.
By the way, as yet no company has gotten FDA approval for a stem cell therapeutic application. At one point, ACT was in the forefront of companies seen as possibly achieving this benchmark (currently the front runner is Osiris Therapeutics, and they have quite a lead). Instead, ACT ran out of money in the spring of 2008 and they've been bobbing and weaving and using the financial ropes to avoid being knocked out ever since. As cash needs began to threaten continued operation late last spring, ACTs market value fell from around $.10 per share to the vicinity of $.02 per share. Since the end of 2008 it has recovered to around $.10 per share in recent trading.
Chronologically, the manner in which Advanced Cell Technology's need for cash has played out since June of last year is set forth below. We should note that the last financials we've seen were March 31 for the quarter ended on that date. Net loss from operations was $9.5 million for the March '08 quarter. Cash at March 31, 2008 was $1.6 million, current debt equaled $11.8 million and total debt was $30.1 million.
The saga became official when the July 14, 2008 10Q included the following statement: "We do not believe that our cash from all sources, including cash, cash equivalents and anticipated revenue stream from licensing fees and sponsored research contracts is sufficient for us to continue operations beyond July 31, 2008 without raising additional funds."
August 14, 2008: ACT granted an exclusive license to Embryome Sciences, Inc., a wholly owned subsidiary of BioTime, Inc. (one of our Stem Cell Sector Companies), to use “ACTCellerate™” embryonic stem cell technology and a bank of over 140 diverse progenitor cell lines derived using that technology. ACT received an upfront payment of $250,000, and became eligible to receive an 8% royalty on sales of products, services, and processes that utilize the licensed technology. Once a total of $1,000,000 of royalties is paid, no further royalties will be due. ACT has an option to reacquire rights to use the ACTCellerate technology for the development of certain types of stem cells for human therapeutic use in fields related to its core business. We're certain there was a time when ACT believed this technology would be worth much more than $1,250,000, but a need for cash removes a lot of bargaining power. We suspect that option to repurchase could be important. At least stockholders should certainly hope so.
August 21, 2008: ACT announced a second deal with BioTime, Inc., again through its subsidiary Embryome Sciences. Embryome Sciences licensed a portfolio of patents and patent applications from Advanced Cell Technology, Inc. relating to induced pluripotent stem cells and "embryonic stem cell differentiation technology." The license is for the commercialization of products in human therapeutic and diagnostic product markets.
Under this deal, Embryome Sciences will pay ACT a $200,000 license fee and an 5% royalty on sales of products, services, and processes that utilize the licensed ACT technology, and 20% of any fees or other payments (other than equity investments, research and development costs, loans and royalties) received by Embryome Sciences from sublicensing the ACT technology to third parties. Once a total of $600,000 of royalties has been paid, no further royalties will be due. A total of $800,000 for this technology with the opportunity for some ups if all goes well? These deals can't be looking that good to shareholders.
September 10, 2008: ACT issued a statement that it "plans to streamline and focus on its most advanced clinical programs as part of a cost reduction program designed to reduce annual operating expenses by $5-6 million. In conjunction with the cost reduction activities, the Company has not renewed its Alameda, California sublease and has vacated its Charlestown, Massachusetts facility."
October 30, 2008: ACT announced today that an Irish institutional investor has increased its funding commitment to the Company by $500,000. Transition Holdings, Inc, which has already provided an additional $150,000 in funding, has increased its total commitment under which it will purchase a total of $1 million of one-year 7% convertible debentures over the next six months. Transition Holdings is obviously run by some fun guys (try googling Transition Holdings; nothing shown excpet this ACT deal). A million in convertible debentures issued by a company that is basically bankrupt (nothing has been done in any of the cash raising measures to reduce the $30 million in debt) is an intrepid move by any standards.
By December 18, Transition Holdings seems to have found its exit strategy in the ACT deal. ACT announced a license agreement with the Ireland-based investor for certain of its non-core technology. Under the agreement, Transition agreed to acquire a license to the technology for $2.5 million, which includes the extinguishment of $1.5 million of debt and an additional funding commitment of $1 million. The intellectual property does not relate to any of the Company’s advanced clinical programs. The Company expects to apply the proceeds it receives in the future towards its retinal pigment epithelium (RPE) cells program. This would appear to be Transition Holdings trying to control what options it feels it has in its Advanced Cell Technology financing. By controlling certain technology it feels it might sell, it can fix it's losses or more definitively estimate potential gains.
December 1, 2008: Advanced Cell Technology, Inc. and CHA Biotech Co, Ltd. (CHA), a leading Korean-based biotechnology company focused on the development of stem cell technologies, announced the formation of a joint venture. The new company – Allied Cell Technology – will develop human blood cells and other clinical therapies based on ACTC’s proprietary hemangioblast cell technology. ACTC will exclusively license to the joint venture, which will be majority owned by CHA, all of its hemangioblast technology. CHA will contribute working capital for the venture as well as paying Advanced Cell a license fee of $500,000.
The new company will be located in Worcester, Massachusetts and will include Dr. Young Chung and the hemangioblast team headed by Dr. Shi-Jiang Lu from ACT. Dr. Robert Lanza will continue to lead ACTC’s retinal program, but will serve in a consulting capacity as Allied’s Chief Scientific Advisor. Besides the exclusive license and transferring the hemangioblast team, ACT will collaborate with the Joint Venture in securing grants to further the research and development of the technology. It is anticipated that this program may some day help address the critical care shortage of blood for emergency situations including military needs. The technology has also been shown to repair vascular damage in animals after heart attacks, limb ischemia, and diabetes.
December 30, 2008: The joint venture between Advanced Cell Technology, Inc. and Korean-based biotechnology company CHA Biotech Co, Ltd., announced today that the company would be named “Stem Cell & Regenerative Medicine International.”
Can we conclude that what ACT has left in terms of existing technology is its retinal program? Given its commitment to the new joint venture will it have either time or money to carry forth new research on its own outside the retinal program? Since CHA Biotech owns the majority of the Joint Venture and is providing the working capital, can we conclude that in terms of time and research invested the most likely long term returns for Advanced Cell will come from license fees earned from the joint venture? what is ACTs plan for getting rid of the balance of its approximately $30 million in debt? ACT currently has a market capitalization of around $11 million. Does this fairly represent the companies value given the adjustments made in 2008? We should have a good idea by the end of 2009..
I think your summary is good, but I would like to point out a common error among analysts to this company.
ACT created the joint venture and is a shareholder (percent unknown, but its safe to say at least 10-30%). In the formation of the joint venture, ACT "licensed" their hemogioblast program. But this is not a typical license. It most likely is an in-kind capital contribution in return for shares of the JV.
Therefore, any profit that is distributed through dividends to shareholders is pro-rata to each shareholders holding. Since the program is the basis for the JV, even with a 10% ownership, that is a double digit royalty payment without any capital expense to fund the program. I believe that because they are providing the research foundation and the leading human capital to the JV, their ownership is closer to 30%..thus a 30% potential profit stream on any future products without development expense...
Posted by: James | January 22, 2009 at 11:58 PM
With the advanced technology ACT has I believe they soon will be one of the leaders in their field. Dr. Lanza has a firm grasp on the science, all this company needs is to be recognized for the leaders it has at the realm.
Posted by: Taimie | January 23, 2009 at 12:13 AM