DYDD Member: [Sheepshead and Gulliver]
Date of Recommendation: [9/30/2005]
Company Name: [Cytori Therapeutics]
Ticker: [XMP.F or CYTDF.PK]
Last Closing Price: €4.23 / $5.28
My Cost Basis Disclosure: €2.8 / $3.5
Market Cap: €76 million/$95 million
ST Target (3 to 6 months): $12.00 – $20.00
LT Target Price (1 to 2 years): $ 25.00 upwards
Risk (High, Medium or Low): [medium]
Company website: www.cytoritx.com
-The future leader in Regenerative Medicine-
Cytori Therapeutics formerly known as MacroPore Biosurgery had its IPO on the German
―Neuer Markt‖ (Translation:
―New Market‖ – Equivalent of
US-Small Cap NASDAQ) in
September 2000. Having
started with an offering price
of 15 € per stock the company
delighted shareholders with a
compound return of -82% or -
17% per annum until may
2005. The Amex Biotech In-
dex as benchmark lost 24% or
6% per annum during the
same period. For the initial
shareholders, who hung on
to their holdings, a disastr-
ous performance indeed!!!
But the company issued a
very unusual press release on
May 2nd, which led some curious investors to dig a little bit deeper into the recent operational
accomplishments of Cytori Therapeutics. The release stated the following:
San Diego, CA, May 2, 2005 - MacroPore Biosurgery, Inc. (Frankfurt: XMP) today an-
nounced it has signed a definitive agreement to raise $11.0 million from the sale of 1.1
million shares of common stock at $10.00 per share. The transaction will be completed
on or before May 31, 2005. As part of the agreement, the investor has been granted an
option that expires December 31, 2006 to purchase an additional 2.2 million shares of
common stock at $10.00 per share.
During the same timeframe retail investors were able to buy that stock for €2.20/$2,75 on the
open market in Germany. What the hell led an anonymous wealthy idiot to sign an equity
placement with a lousy little biotech startup and let him pay a stock price premium of
On May the 18th a second exceptional press release followed:
San Diego, CA, May 18, 2005 - MacroPore Biosurgery, Inc. (Frankfurt: XMP) today an-
nounced its Board of Directors has amended the Company's Stockholder Rights Plan,
which was adopted in 2003. This Amendment allows Neil Gagnon (including Gagnon
Securities LLC) to beneficially own up to 20 percent of the outstanding shares of the
Company's Common Stock, before triggering the protective rights of the Plan. All other
provisions of the Plan remain unmodified and in full force and effect. A copy of the
Amendment to the Company's Stockholder Rights Plan has been filed with the US Se-
curities and Exchange Commission. MacroPore Biosurgery notes that the permission
granted to Neil Gagnon by this Amendment is unrelated to the Company's announce-
ment of its $11.0 million equity placement agreement.
Adopted in 2003, the company’s stockholder rights plan prevented every single investor or
group to beneficially own more than 15% of the company’s common stock. If so, the stock-
holder rights plan gave every other investor an additional share for each stock held in order to
prevent a hostile take over.
For what reason would the well known Wall Street veteran and Life Science investment spe-
cialist Neill Gagnon want to acquire 2.215 million shares of the company and convince their
board to modify the stockholder rights plan to be able to increase his stake? Having made a
fortune with investments in companies like LifeCell or Kensey Nash, Gagnon often has dem-
onstrated his foresight for emerging and successful start ups.
On June the 5th, a short, unspectacular notice, obligated by law for having acquired more than
5% of the outstanding stock of a company, was published in the German ―Boersenzeitung‖.
This notice unveiled that the anonymous idiot equity investor who was willing to pay a 260%
stock price premium is based in Asia - the diversified Japanese digital camera and tele-
scope giant Olympus Corp.
During their latest conference call, on August 15, management stated that they had applied
for Listing on the NASDAQ Small Cap market.
Reasons enough to have a closer look at this company!
Having its headquarters (and sole operations) in San Diego, California, MacroPore Biosur-
gery, Inc. (MacroPore) was initially formed as a California general partnership in July 1996,
and incorporated in the State of Delaware in May 1997.
The company was founded to develop and manufacture bio-resorbable orthopaedic implants.
The products are used to maintain the relative position of weak bony tissue or bone grafts in
reconstructive orthopaedic procedures. Indications for use include cement restriction in hip
arthroplasty, acetabular reconstruction, reconstructive orthopaedic procedures involving tu-
mour resections, and trauma procedures involving hard tissue (bone) in conjunction with tradi-
tional rigid fixation.
In September 2000 Cytori went public with an IPO on the German ―Neuer Markt‖ for
€15/$18.75 a share, which allowed them to collect over 70 million $. Although being an US
firm the company chose the German market to list their stock, because of the fact they had a
German founding member, a German CFO and because of the attractive valuation multiples,
which investors were willing to pay during the tech bubble in Germany in 2000.
An important strategic decision was made in October 2002, when MacroPore acquired the
stem cell company StemSource for 10 million $. StemSource has been founded by Marc Hed-
rick. He is the current Chief Scientific Officer of Cytori Therapeutics and Associate Professor
of Surgery and Pediatrics at the University of California, Los Angeles (UCLA). StemSource
and UCLA jointly invented a medical device to abstract stem cells derived from adipose, also
known as fat tissue. Since 2002 most of the companies research and development costs are
spend for their stem cell business unit.
The transition of the company from a medical device outfit to a stem cell specialist is docu-
mented by the recent name change from ―Macropore Biosurgery‖ to ―Cytori Therapeutics‖ in
Before we can go into more detail about the company’s scientific approach, we first have
to learn a little bit about the basics of the technology.
What is the magic behind stem cells?
Because of having more economical then scientific know-how, the best approach is to
provide a short abstract from wikipedia.com:
Stem cells are primal undifferentiated cells, which retain the ability to differentiate into
other cell types. This ability allows them to act as a repair system for the body, replenish-
ing other cells as long as the organism is alive. Medical researchers believe stem cell re-
search, also called regenerative medicine, has the potential to change the fate of human
diseases by being used to repair specific tissues or even to grow organs. Still, as govern-
ment reports point out, "significant technical hurdles remain that will only be overcome
through years of intensive research. The study of stem cells dates as far back as to the
beginning of the 60´s.
Types of stem cells
Stem cells are categorized by potency which describes the specialty of that cell.
Totipotent stem cells are produced from the fusion of an egg and sperm cell. Cells
produced by the first few divisions of the fertilized egg cell are also totipotent. These
cells can grow into any cell type without exception. Individuals can grow out of each
of these cells
Pluripotent stem cells are the descendants of totipotent cells and can grow into any
cell type except for totipotent stem cells.
Multipotent stem cells can produce only cells of a closely related family of cells (e.g.
blood cells such as red blood cells, white blood cells and platelets).
Progenitor (sometimes called unipotent) cells can produce only one cell type; but,
have the property of self-renewal which distinguishes them from non-stem cells.
What are the sources of stem cells?
Embryonic stem cells are cultured pluripotent cells obtained from the undifferentiated in-
ner mass cells of a blastocyst, an early stage embryo that contains 50 to 150 cells. Recently
it has been shown that embryonic stem cells can also develop into egg cells and sperm.
Research with embryonic stem cells derived from humans is controversial because,
in order to start a stem cell 'line' or lineage, it requires the destruction of a blastocyst,
which some people believe to be a human being.
Adult stem cells are undifferentiated cells found among differentiated cells of a specific tis-
sue and are mainly multipotent cells. While embryonic stem cells only exist during the early
stage embryo, adult stem cells are available in the human organism the whole lifecycle
long. These cells differentiate into new specialised cells the whole time. They are already
being used in treatments for over one hundred diseases and conditions. They are more ac-
curately called somatic (Greek σωμα sōma = body) stem cells, because they need not
come from adults but can also come from children or umbilical cords.
What are the most common abstraction techniques?
Cord blood stem cells: Blood from the placenta and umbilical cord that are left over
after birth is one source of adult stem cells. Since 1988 these cord blood stem cells have
been used to treat Gunther's disease, Hunter syndrome, Hurler syndrome, Acute lympho-
cytic leukaemia and many more problems occurring mostly in children. It is collected by re-
moving the umbilical cord, cleansing it and withdrawing blood from the umbilical vein. This
blood is then immediately analyzed for infectious agents and the tissue-type is determined.
The cord blood is processed and depleted of red blood cells before being stored in liquid
nitrogen for later use, at which point it is thawed, washed of the cryoprotectant, and injected
through a vein of the patient.
Bone marrow stem cells: Bone marrow stromal stem cells are thought to be able to
transform into liver, nerve, muscle, hair follicle and kidney cells. Although there is some evi-
dence that this type of trans-differentiation can occur, many scientists are sceptical of these
claims and we are still learning about such trans-differentiated cells.
Adipose derived adult stem (ADAS) cells: Adipose derived adult stem cells have
also been isolated from fat, e.g. from liposuction. This source of cells seems to be similar in
many ways to mesenchymal stem cells (MSCs) derived from bone marrow, except that it is
possible to isolate many more cells from fat. These cells have been shown to differenti-
ate into bone, fat, muscle, cartilage, and neurons.
Olfactory stem cells: Adult stem cells isolated from the olfactory mucosa (cells lining
the inside of the nose involved in the sense of smell) have the ability to develop into many
different cell types if they are given the right chemical environment. These adult olfactory
stem cells appear to have the same ability as embryonic stem cells in giving rise to many
different cell types but have the advantage that they can be obtained from all individuals,
even older people who might be most in need to stem cell therapies. Adult olfactory stem
cells are readily obtained from the nose and relatively easy to grow and multiply in the lab.
In a few weeks one can make plenty of cells for transplantation.
Policy debate in the U.S
In 1995, Congress passed the Dickey Amendment, prohibiting federal funding of research
that involves the use of a human embryo. Privately funded research led to the breakthrough
that made embryonic stem cell research possible in 1998, prompting the Clinton Administra-
tion to develop federal regulations for its funding. Preparations for this funding were com-
pleted in 2001. President George W. Bush announced, on August 11, 2001 that federal
funds could be used to support research on the newly developed field of human embryonic
stem cells, but that funding would be limited to "existing (embryonic) stem cell lines where
the 'life-and-death decision' has already been made". This limitation does not apply to re-
search involving stem cells from other sources, such as umbilical cord blood, placentas, and
adult and animal tissues. Some conservative religious groups felt the restrictions should
have been stronger, while many scientists felt frustrated with the restrictions.
In April 2004, 206 members of Congress, including many moderate Republicans, signed a
letter urging President Bush to expand federal funding of embryonic stem cell research
beyond what Bush had already supported. In May 2005, the House of Representatives
voted 238-194 to loosen the limitations on embryonic stem-cell research — by allowing sur-
plus frozen embryos from in vitro fertilization clinics to be used for stem cell research with
the permission of donors — despite Bush's promise to veto the bill if passed. Similar meas-
ures are pending in the Senate. On July 29, 2005, Senate Majority Leader William H. Frist,
announced that he too favored loosening restrictions on federal funding of embryonic stem-
cell research, making passage of an embryonic stem-cell funding bill in the Senate more
Emerging U.S. Funding Initiatives
California voters in November 2004 approved Proposition 71, creating a US$3 billion state
taxpayer-funded institute for stem cell research, the California Institute for Regenerative
Medicine. Providing $300 million a year, the institute is thought to be the world's largest sin-
gle backer of research in stem cells, and is expected to substantially increase the pace of
embryonic stem cell research.
Several states, in some cases wary of a national migration of biotech researchers to Cali-
fornia, have shown interest in providing their own funding support of embryonic and adult
stem cell research. These states include Connecticut, Florida, Illinois, Massachusetts , New
Hampshire, New Jersey, New York, Pennsylvania, Texas, Washington, and Wisconsin.
Other states have, or have shown interest in, additional restrictions or even complete bans
on embryonic stem cell research. These states include Arkansas, Iowa, Kansas, Louisiana,
Michigan, Missouri, Nebraska, North Dakota, South Dakota, and Virginia. (Source: “States
play catch-up on stem cells”, USA Today, December 2004)
For further researches please take look at the following websites which offer an ex-
cerpt of the daily news in the stem cell sector: www.hypeandhope.com,
The superior attributes
of adipose derived stem cells
in comparison to common
In respect of the non-controversial adult
stem cells, scientists have researched
their potential now for almost 40 years.
Most of the research however, has been
conducted with bone marrow stem cells (MSC´s) . In this respect the name Arnold Caplan of
Case Western University is very well known and regarded by many as the ―Godfather‖ of
adult stem cell research. Caplan was also one of the founders of Osiris Inc, a privately held
company, with has started several clinical studies using cultured MSC´s. An example of a
publicly listed company using cultured bone marrow stem cells is Aastrom Biosciences Inc -
Market Cap approx. 250 Mio $.
The research on adipose derived stem cells (ADAS) is however, a rather recently discovered
development. Research was mainly concentrated at the University of Pittsburgh and UCLA,
from which in 2002 the research papers originated, which showed that ADAS cells have at
least the same ―potency‖ in all critical areas as the better known MSC´s. So, a very “young”
technology for which Cytori, however has sole world wide filed “extraction” patents
and licences, which is different compared to MSC´s, where the intellectual property is
not protected by patents. At the last conference call by the company, the CEO stated very
assured and confidently, that the cells from fat are superior to all other adult stem cells
derived from presently known sources, yes, even superior to embryonic stem cells.
Is he bluffing? Or simply slightly overdosed by fat cells put into his brain? Most likely not,
since the whole management team consists of highly reputable scientists. The scientific advi-
sor is even the Chair of the Cardiovascular Research Institute at Harvard Medical School,
Kenneth W. Chien, also advisor at Genentech and Roche. These guys do not bluff or play
poker, except for maybe occasionally in their rare spare time.
Adipose, also known as fat tissue is the richest and most accessible known source of
stem cells. It contains a specialized class of stem cells comprised of multiple cell types that
promote healing and repair. Adipose stem cells have been shown to differentiate into multiple
cell types, including muscle cells (heart, smooth and skeletal) bone, fat, cartilage and nerve.
Beyond differentiation, regenerative cells may provide therapeutic benefit through the release
of growth factors and other therapeutic healing mechanisms.
The major advantages of adipose tissue as a source of regenerative cells, which distinguish it
from alternative cell sources, include:
+ Ethics: No embryonic stem cells are needed
+ Yield: A therapeutic dose of regenerative cells can be isolated in approximately one
hour without cell culture
+ Safety: Patients receive their own cells (autologous-use) so there is no risk of immune
rejection or disease transmission
+ Versatility: Stem cells from adipose tissue impart benefit from multiple mechanisms-of-
Although the common media definitely is insufficiently informed about the superiority of fat tis-
sue as source for adult stem cells, a growing community of medical scientists have already
acknowledged that fact and several studies and clinical trials are ongoing towards ADAS in
tissue engineering. Since 2002 these initiatives are supported by an organisation (The Inter-
national Fat Applied Technology Society (IFATS), a 501 (c) (3) non-profit organization) which
tries to promote recent ADPS recovery on its official conferences once a year. This year’s
conference was held in Charlottesville and took place between September 10 th and 13th.
Cytori´s unique technological approach
In association with the UCLA, Cytori has developed a medical device which supports the
common doctor by absorbing stem cells from adipose derived tissue. To facilitate processing
and delivery of adipose stem cells, Cytori is developing its proprietary Celution™ system to
isolate and concentrate a patient's own stem cells in approximately a one-hour period of time.
This system will dramatically improve the speed in which personalized, cell-based therapies
can be delivered to patients. The Celution™ System is being designed to automate the pro-
prietary process and methods for extracting and purifying a high yield of stem cells. Cytori's
goal is to introduce the first system that can enable real-time, cellular therapy at the bedside.
The process in which the patient's cells are extracted, processed and delivered is dia-
On August 11th, the company reported that the development of the Celution system has been
finished. See Announcement below. During the second half of the year they also intend to file
additional 501K applications with the FDA to ensure approval for use in clinical trials later in
2006 in the USA.
San Diego, CA, August 11, 2005 - Cytori Therapeutics, Inc. (Frankfurt: XMP), today an-
nounced it has completed the development of its Celution™ System for the isolation
and concentration of adipose stem cells and will submit CE Mark application seeking
approval for the system in Europe.
Current Therapies under development using Cytori Technology
The CelutionTM medical device has been developed to be the ―hardware‖ used by clinics and
surgeons for a variety of indications and therapies. Extraction and purification of adipose cells
from fat, harvested through liposuction, is designed to be performed through disposables pre-
pared for a specific therapy i.e. being the ―software‖ for the system.
Pre-clinical research by Cytori and liaised universities has mainly focussed on its ―assumed
blockbuster‖ cardiovascular disease therapy after acute myocardial infarction. The com-
pany has performed several pre-clinical studies on small animals (mice) and has reported ex-
tremely encouraging results, which at the present time are being presented at different Indus-
try Conferences. Earlier in 2005 Tulane University (Prof. Eckhard Alt) and UCLA (MD PhD
Rob McLellan) reported independently, similar exciting results on improved heart function
after induced infarct at large animals (Swine) and treatment with adipose cells.
As described before, clinical trials are anticipated starting early 2006 in Europe (where the
experience with stem cell trials is somewhat more advanced), followed by the US later in the
year. Cytori intends to develop the therapy on its own (at least until the ―blockbuster‖ value is
recognized by the market), but is opting for the partnership strategy for all other potential ap-
Another important therapy field is the spine- and orthopaedic area, where the fit to the activi-
ties of main shareholder Olympus is very obvious. In the current year the first partnership
deal is scheduled to be announced, of which the financial considerations will be very
important in the judgment of the value of the proprietary Cytori technology.
Other research went mainly into the cosmetic- and reconstructive surgery arena, however due
to the versatility of adipose stem cells, the known indications other stem cell companies are
targeting such as liver, nerve system etc are likely to become subject of therapeutic develop-
ment depending the success of the present therapies being developed and adding partners.
Additionally there are several medical institutions which pursue their stem cell trials with Cy-
tori´s core technology.
The underlying table sums up some of their recent accomplishments:
Clinical Applications Country Status
Ongoing: Phase 2B (50 Patients)
Wound healing (Crohn´s fistula repair) Spain
Completed case study: cells
healed skull defect in seven year
Bone repair (Cranio-Maxillofacial Surgery (2004) Germany
old girl that was unresponsive to
Ongoing: Physician-initiated clini-
Breast augmentation Japan
Companies with advanced research and development programs for regenerative treatments
of cardiovascular disease include Baxter, BioHeart, Genvec, MG Biotherapeutics, Osiris, and
ViaCell. A Phase I study has been initiated at St. Elizabeth’s Medical Centre in Boston using
stem cells extracted from peripheral blood as an investigational treatment for myocardial
BioHeart is currently recruiting patients in the United States for a Phase I clinical study on the
investigational product MyoHeart TM, an autologous, skeletal myoblast cell therapy for heart
disorders, which is delivered via a percutaneous catheter system. BioHeart is also conducting
a Phase II trial in Europe evaluating MyoHeart™ for congestive heart failure. Using similar
technology, Genvec has completed a Phase I trial using skeletal myoblasts, and MG Bio-
therapeutics is currently recruiting 200 patients in the United States and Europe for a Phase II
study with their investigational, autologous skeletal myoblast cell therapy for transplantation
into the heart during bypass surgery.
Osiris Therapeutics, Inc. is planning to begin Phase I clinical trials in early 2006 for Provacel
TM, an investigational, allogenenic, adult, mesenchymal (bone-marrow-derived) stem cell
therapy for acute myocardial infarction. ViaCell, Inc. is currently in pre clinical development for
cardiac disease dealing with congestive heart failure and myocardial infarction.
Cytori´s main competitive advantage
Cytori´s main competitive advantage is based on its use of adipose derived tissue. As stated
before ADAS cells can be extracted via liposuction and processing in Celution in about one
hour. The number of cells obtained represents an adequate therapeutic dose to con-
duct every kind of Tissue Engineering. So no further cell culture is needed.
A statement of Mark H. Hedrick, the companies Chief Scientific Officer outlines this fact:
Cell culture is a process whereby cells are grown for a period of at least two days to three weeks in a
laboratory to obtain therapeutic quantities. Every time a cell divides there is a risk that the DNA is imper-
fectly copied into the daughter cells; specifically of a mutation. The more cell divisions there are the
greater the risk. As these mutations accumulate there is a chance of malignancy or other problem.
The US Food and Drug Administration recognizes this risk and includes the process of cell culture as
being “more than minimal manipulation”. Specifically, in a document entitled “Proposed Approach to
Regulation of Cellular and Tissue-Based Products” dated February 28, 1997 the FDA stated that: “Ex-
amples of more-than-minimal manipulation of cells and tissues include cell expansion*, encapsulation,
activation, or genetic modification.”
*In this context it is recognized that expansion is defined as the process of cell culture applied to increase
(expand) cell number. This interpretation is confirmed by other FDA documents including that cited be-
Thus, in the Federal Register of January 19, 2001 (Vol. 66) it states that “We do not agree that the ex-
pansion of mesenchymal cells in culture or the uses of growth factors to expand umbilical cord blood
stem cells are minimal manipulation.”
Thus, the FDA recognizes that cell populations that have been cultured are different and accord-
ingly regulates such populations differently. Our cells are not cultured
Secondly, the process of cell culture requires the application of Good Manufacturing Processes and ex-
pensive, highly purified reagents to ensure that the cell output is not contaminated by infectious agents or
animal products that could cause an immune or allergic reaction. This is a very costly process which is
avoided by avoiding cell culture.
The therapeutic cells that we are developing contain cells with the ability to differentiate into mul-
tiple cell types (stem cells), cells that make growth factors that stimulate the growth of blood ves-
sels (for example VEGF and Placental Growth Factor) and the survival and growth of injured cells
(for example HGF), and cells that can form blood vessels. Each of these capacities has been inde-
pendently demonstrated in published studies. (Mark H. Hedrick)
The above fact, that the extracted cells are non cultured and non-manipulated autolo-
gous (own body) cells, most likely will have an impact on the approval process re-
quired by the FDA.
All main competitors like Osiris, Aastrom Biosciences and StemCells are in the process of en-
tering- or have entered clinical phases in accordance with the common IND – standard (In-
vestigational New Drug) for FDA approval of their products. This approval process normally
requires a time line which varies from 5 to 10 years depending on many variables and of
course positive results.
Cytori will however, most likely, be allowed by the FDA to achieve commercialisation of their
therapies according to the FDA rules and regulations surrounding medical devices. The Celu-
tion system and its disposables carrying the compounds, which extract the required autolo-
gous cells, can be approved trough the 510k procedure and gain the status of IDE (Investiga-
tional Device Exemption). Normally this is clinical process, which requires 2-3 years and
supports the company’s view that Cytori will come to the market with their main cardio-
vascular therapy, at least 2-3 years ahead of the competition.
Business Unit Bio-resorbable Products
Originally started as a medical device company, Cytori built up tremendous experience con-
cerning the regulation process with its bio-resorbable products. Since 1997 Cytori´s team de-
veloped 3 bio-material product lines comprised of more than 800 individual products
and 50 regulatory approvals and clearances worldwide. This has resulted in ownership or
rights to 14 issued patents and more than 120 pending domestic and international patents.
The name change from MacroPore Biosurgery to Cytori in July 2005 emphasised the
changed focus of the entity on the development of cell therapies, however the bio-resorbable
business, which now operates under the name MacroPore as a Division of Cytori, also has
developed some real cutting-edge technological products.
What is the function of bio-resorbable products?
Bioresorbable polymer implants are made from essentially the same lactic acid molecular
building blocks that occur naturally in the human body. (Lactic acid is produced in the muscle
during strenuous activity.) Long molecular polymer chains are created by combining lactic ac-
id derivatives known as lactides. The resulting polymers are generally referred to as poly-
lactides or PLa. MacroPore Biosurgery implants, used for hard tissue (bone) and soft tissue
applications are made from Poly-lactide: a copolymer of 70:30 Poly (L-lactide-co-D, L-lactide).
Bioresorbable implants are used as containment implants that are both biologically and bio-
mechanically active, for spinal fusion and spine graft fixation, as well as other applications for
treating diseases, deformities or trauma of the musculo-skeletal system.
How are bio-resorbable implants absorbed by the body?
The copolymer maintains its strength during the healing process and through hydrolysis slow-
ly breaks down into lactic acid molecules. The re-sorption process occurs in two phases: (1)
H2O (water) penetrates the implant, reacts with the polymer and breaks the polymer chains
(hydrolysis); (2) hydrolysis converts the long chains into shorter chains until the polymer
fragments into single lactic acid molecules. Lactic acid molecules are then metabolized by the
liver into CO2 and H2O and released through the lungs.
Cytori´s Product Lines
Two of the three developed product lines have been sold to third parties, in order to be able to
fund the stem cell business unit without diluting current shareholders. In 2002 the company
sold their CMF product line (bio-resorbable bone fixation implants for the face and skull, and
associated instruments and accessories) to sales & marketing partner Medtronic. For almost
the same amount Cytori sold its SurgiWrap product line (bio-resorbable product for soft tissue
indications) to Mast Biosurgery AG.
The only remaining product line is Hydrosorb. The HYDRO-
SORB™ family consists of five unique surgical devices for
spine and orthopedic applications. HYDROSORB™ implants
provide the early and intermediate stability required for healing,
but without the potential long-term complications of metal, such
as stress shielding or migration. They are also the first bio-
resorbable alternative to allograft cadaver bone implants, offering safe and predictable per-
formance, while eliminating the disadvantages of disease transmission and unreliable supply
The HYDROSORB™ Boomerang Ò , HYDROSORB™ Cornerstone™ HSR, HYDROSORB™
Mesh and HYDROSORB™ Telamon® products have received FDA clearance in the United
States for certain graft containment applications, and have received the CE Mark in Europe
Illustrations depict MacroPore OS
for spinal inter-body fusion pro-
cedures. The HYDROSORB™
Spine System has received FDA clearance in the United States for use in spinal fusion pro-
cedures, in conjunction with traditional rigid fixation, as a means to maintain the relative posi-
tion of weak bony tissue such as autografts. The HYDROSORB™ Shield has received FDA
clearance in the United States for minimizing the attachment of soft tissue, and has received
the CE Mark in Europe for the control of post-operative adhesions in spine surgery.
As stated above, Hydrosorb products are exclusively marketed through Medtronic. Both com-
panies signed an extension of the distribution agreement in 2002 which contains a supply
contract until 2012 and a ―first right of marketing‖ clause to Medtronic for all of Cytori´s
products up to 2006. Medtronic has a stake in Cytori, holding 1 million shares of Cytori´s
stock, which represents 5.5% of outstanding shares.
Hydrosorb revenue growth has been pretty disappointing so far. Below is a summary of
the quarterly revenue development:
Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005
991K 1.967K 3.483K 3.441K 1.652K 887K 298K 966K 1.755K 1.541K
As the table indicates there has been a significant slow down of Hydrosorb sales in 2004 after
initial stock build-up by Medtronic in the second half of 2003. In fact the relationship between
both companies has been very icy during that time. Cytori had market indications, that the
product was very well received by the medical community and blamed Medtronic of doing a
bad marketing job. But as quarterly revenue is growing again somewhat the stressed relation-
ship is easing slightly. However, product sales from first half of 2005 are also based on stock-
ing orders by Medtronic for the new product Mystique. As CFO Saad indicated in a recent
phone call Medtronic is pretty enthusiastic about Mystique, which is quite a change
from their apparent attitude towards Hydrosorb.
The MYSTIQUE Plate is made of HYDROSORB® PLDLA co-polymer. This co-polymer con-
sists of 70 percent Poly (L-lactide) and 30 percent Poly (D, L-lactide). More than 10 years of
clinical experience and research have shown that implants manufactured from PLDLA mate-
rials provide clinicians with a higher level of surgical versatility. The MYSTIQUE Resorbable
Graft Containment Plate received U.S. Food and Drug Administration clearance in July 2004,
for non-load bearing indications using additional rigid fixation. The MYSTIQUE Plate is the
first implant of its kind for spinal surgery. When surgery is needed to alleviate nerve or spinal
cord compression, a surgeon may perform a procedure called an anterior cervical discectomy
and fusion. In this procedure the surgeon makes a small incision in the front of the neck to
reach the cervical spine. The disc is removed and the space is filled with bone graft. The
MYSTIQUE plate is used for stabilizing the weak bony tissue around the fusion, preventing
bone graft dislodgement and facilitating healing. The new plate is flexible and made of mate-
rial that dissolves in the body within 18 to 36 months after implantation.
Nearly 200,000 cervical spinal fusions are performed each year to treat degenerative disc
disease. Degenerative disc disease, which affects approximately half of the population age 40
and older, can cause a variety of symptoms, including back or neck pain, nerve root pathol-
ogy and spinal cord compression. Spinal fusion, a surgery commonly used to treat degenera-
tive disc disease after conservative treatments have failed, stabilizes the vertebrae to elimi-
nate the pain caused by a degenerated disc.
The plate's transparent nature allows doctors to visualize the spine during surgery and can
improve the reading of postoperative X-rays. The plate can also be contoured to better match
the patient's unique anatomy before insertion.
Medtronic introduced the product into the market in August this year and holds an approx.
50% market share in spinal fusions. For this reason Cytori management is also ―muted‖ en-
thusiastic for the current prospects of the product line.
Competition Bio-resorbable Products
The spinal- and orthopaedic field of medicine is presently still dominated by autograft- (own)
and allograft (cadaver) materials, whereby the fixation products are often made of metal (tita-
nium) having the disadvantage of requiring additional surgery for removal from the body after
a period of time. Synthetic products are on the move and gaining market share, but presently
are only at 15-20%. Innovative products are only slowly accepted by the conservative market,
dominated by Stryker, Zimmer, Medtronic and others, requiring many years of clinical experi-
ence. Long term commercial ―relations‖ often also play a role, as indicated by the recent SEC
probe in this business.
In spite of being a relatively small enterprise with round about 120 employees Cytori has al-
ways been able to hire very talented and knowledgeable individuals and some very experi-
enced business angels. Here are the most important ones:
Christopher J. Calhoun, Chief Executive Officer:
Christopher J. Calhoun is a co-founder of Cytori Therapeutics and has served as
the Company's Chief Executive Officer, Vice-Chairman and Director of the Board
since 1997 and as President from April 2002 to May 2004. Additionally, Mr. Cal-
houn previously served as the Company's President from 1996 through 1998.
Mr. Calhoun is also the co-inventor on multiple U.S. and International patents
used for the Company's bio-resorbable implant technology. Mr. Calhoun received a B.A. from
the University of California, San Diego and an M.B.A. from the University of Phoenix.
Marc H Hedrick, MD, President and Chief Scientific Officer:
Dr. Marc H. Hedrick was appointed President in May 2004. Dr. Hedrick joined
Cytori Therapeutics as Chief Scientific Officer, Medical Director and Director in
October 2002. Previously, Dr. Hedrick co-founded, and served as President and
Chief Executive Officer of StemSource, Inc., a company specializing in stem cell
bioengineering, research and technology. Dr. Hedrick is a plastic surgeon, and
an Associate Professor of Surgery and Pediatrics at the University of California, Los Angeles
(UCLA). Since 1998, he has directed the Laboratory of Regenerative Bioengineering and Re-
pair for the Department of Surgery at UCLA. Dr. Hedrick obtained his M.D. degree from the
University of Texas Southwestern Medical School, Dallas.
Mark E. Saad, Chief Financial Officer:
Mark E. Saad joined Cytori Therapeutics as Chief Financial Officer in June 2004.
Previously, Mr. Saad served as Chief Operating Officer of UBS, Healthcare
Investment Banking, New York, where he was responsible for global in-
vestment banking operations. Upon joining UBS, Mr. Saad served as Direc-
tor/Executive Director covering life sciences sectors - biotechnology and medical
devices. Mr. Saad held a significant role in building the UBS franchise to become the largest
healthcare group on Wall Street. Prior to joining UBS, Mr. Saad held the position of Financial
Analyst/Associate with Salomon, Smith Barney, Healthcare Investment Banking, New York,
where he managed public and private transactions. Mr. Saad holds a B.A. from Villanova Uni-
versity, Philadelphia, PA.
Additionally the company impressively demonstrated their will to speed up their clini-
cal developments by adding 3 experienced executives to their management team dur-
ing the last 6 months:
Dr. Kai Pinkernell, a cardiologist and stem cell scientist, has been named to the position of
Director of Clinical Applications.
Dr. Douglas Arms, was named Vice President of Product Development for Regenerative Cell
Technology and brings 8 years experience from InterPore/Biomet developing sophisticated
cell processors and disposable products.
Dr. Alex Milstein has been awarded to the position of Vice President of Clinical Develop-
ment. Dr. Milstein spent the past 5 years at Medtronic and Guidant in development and exe-
cution of clinical strategies for cardiovascular products primarily focused on drug and device
And last but certainly not least, the appointment of an important Scientific Advisor:
The Company also announced the appointment of Kenneth R. Chien, M.D., Ph.D., as a
scientific advisor. Dr. Chien is the Charles R. Sanders Endowed Chair in Medicine, at
Harvard Medical School, and Director, Massachusetts General Hospital Cardiovascular Re-
search Institute. Dr. Chien serves as a Board member of the Pasarow Medical Foundation,
and as an advisor to multiple biotechnology/pharmaceutical companies including Ge-
nentech and F. Hoffman-LaRoche.
Neil Gagnon, owner of Gagnon Securities, said not too long ago, ―Cytori is the only practical
stem cell company that I know‖. We think, that this is really the case. The Celution system as
the base hardware of the system with the different extraction disposables for different thera-
pies, appear a most practical- and efficient business platform for the future. Most likely this
will be like a razor- razorblade approach, whereby Celution (the razor) is heavily subsidized or
brought for free into the clinics and the therapy disposables (razorblades) are sold at ―market‖
depending on usage by the clinic.
As an example, Cytori has indicated that the extraction of cells to be used for the cardiovas-
cular therapy will be sold for $5.000 per therapeutic dose. Take that as market value of the
therapy (there is presently no therapy for repair of the heart muscle anywhere, i.e. no guide-
line) and knowing that of the 1 Million Americans, who suffer a heart attack annually, approx.
390.000 require some sort of repair of the heart muscle, one is looking at a potential mar-
ket of approx. 2 Billion $, which most likely will be entered first by Cytori. Schumpeter
economic theory re-visited.
The other therapies to be developed with partners (Olympus, Baxter?) look similarly promis-
ing in respect of the potential and timeline, although not as ―blockbuster‖ like as the heart
therapy. If one compares Cytori with its peers (to which it is extremely undervalued – see
later), it should also be noted that the bio-resorbable business is kind of a freebee on top of it.
Highly attractive in our opinion.
First of all, it has to be said that the quality of Cytori´s financial reporting is very high. Espe-
cially quarterly- and annual reports are extensive and transparently written, so that every in-
vestor, who is interested in gaining further information about historic company developments,
accounting standards and competitive developments etc. is well informed. Presently they are
also compliant to the Sarbanes-Oxley Act, which even many S&P companies only fulfilled
Enclosed is a summarized balance sheet as of 6/30/2005: (in thousands)
Assets Liabilities & Stockholders´ Equity
cash & cash equivalents 3.076 Accounts payable and accrued expenses 2.489
short-term investments available-for-
sale 11.746 Current portion of long term obligations 773
Accounts receivable 491 Total current liabilities 3.262
Inventories 532 Long-term liabilities 17.109
Other current assets 901 Total liabilities 20.371
Total current assets 16.746 Preferred & common stock 18
Property and equipment 2.900 Additional paid in-capital 77.817
Other assets 393 Accumulated deficit -61.361
Intangibles 1.987 Treasury stock, at cost -10.414
Goodwill 4.387 Several Positions 36
Long term Assets 9.667 Total stockholders´ equity 6.042
Total assets 26.413 Total liabilities & stockholders´ equity 26.413
Cytori´s fixed cost block will probably be in the range of 24-25 Mio $ in 2005 (120 employees),
covering all GA, Selling and R&D expense. Contrary to its peers, where these amounts virtu-
ally represent the net loss for the business, Cytori will have 3 types of income generated.
First component is the gross margin and cash from the bio-resorbable business, which will be
in the range of 5 to 7 Mio $ for 2005.
Secondly, the (non-cash) income from deferred profits of the sale of businesses cashed in
2004, which will be 6 to 7 Mio $.
And thirdly, (cash) income from the partnership most likely to be closed with Olympus (Up-
front payment, Research cost sharing). In view of SAB 101 any upfront payment are likely to
be deferred over the anticipated lifetime of the partnership, so no income is to be assumed for
2005, however could have a major impact on future financials (Cytori has stated that the
financing of the heart therapy development is assured by cash from future partner-
ships). The outlook for 2005 therefore should be a loss of 10 to 14 Mio $.
Current structure of ownership
First of all it has to be mentioned that Cytori is following an absolute shareholder friendly anti-
dilution strategy. Instead of financing their R&D through selling of stock, they preferred to sell
their non core product lines and even bought back round about 3 million shares during 2002
and 2003 for prices between $3 and $4. This is a clear indication, that they consider their
stock to be significantly undervalued in this current price range. Note that that buyback
has been finished two years before where they were far behind their current scientific stan-
dard. As of 6/30/05 they had 18,040,018 and 16,820,018 shares issued and 15,167,184 and
13,947,184 shares outstanding in 2005 and 2004, respectively. In the balance sheet the re-
purchased stocks are valued as treasury stock. The Olympus options are included in each of
the leading numbers. In a phone Call with the management CFO Saad said that they in-
tended to void the treasury stock so that the number of shares issued and outstanding
would be reduced to 16,820,018 and 13,947,184 respectively. The investor relations group
provided the information that middle and upper management hold roughly 1 million stock of
the company, in addition to the official stock option plan. CFO Saad suggested indirectly, that
further equity placements are not planned until the stock price has passed the price of Olym-
pus´ options ($10).
Current structure of ownership (calculation based on 18,040,018 issued and outstanding)
Holder In millions in %
Treasury stock: 3 16.63%
Gagnon Securities: 2.25 12.25%
Olympus Corp.: 3.3 18.29%
Medtronic Inc: 1 5.54%
Management: 1 5.54%
Retail investors 7.53 41.74%
(derived from SEC filings, Cytori press releases, phone calls with management, nasdaq.com)
Peer Group Comparison
Cytori Therapeutics Aastrom Biosciences StemCell Inc
Employees 120 49 36
approx. 80 Mio $ approx. 240 Mio $ approx. 340 Mio $
Acc. Deficit 60 Mio $ 126 Mio $ 165 Mio $
Main Ther- Central Nervous System
Cardiovascular Disease Severe Bone Fractures
apy (juvenile Batten´s Disease)
Spine and Orthopaedics Ischemic vascular disease
Wound healing (Crohn´s) Jaw reconstruction Liver Disease
Cosmetic- & Reconstructive Spinal Fusion Pancreas Disease
Cell Source Adipose Tissue Bone Marrow Tissue Organ Tissue
From the above table, the main variances can immediately be recognized - despite possess-
ing proprietary intellectual rights on the base extraction technology and having a broader
therapy development base, Cytori is severely undervalued, when compared to its peers.
Reason for that is the obvious disconnect, the German investors have, with the Life Science
business in general and who do not see its potential.
To illustrate the discrepancy between the financing strategies of Aastrom and StemCell (both
are already members of the RUSSEL 3.000) on the one hand and Cytori´s antidilutive strat-
egy on the other hand and what this would indicate towards Cytori´s low number of out-
standing shares once arbitration players notice that there is an additional serious player on
the radar now we added the following table.
Cytori Therapeutics Aastrom Biosciences StemCell Inc
Ticker XMP.F ASTM STEM
€4.23 $2.24 $5.07
52wk Range €1.72 - 4.83 0.84 - 4.36 1.45 - 6.77
18,040,018 102,328,785 63,545,160
Free Float 7,500,000 92,000,000 52,100,000
29,833 3,425,080 3,142,410
insider owner- 58% 10% 18%
Sources: SEC filings, yahoo.finance.com
The management decision to list on the NASDAQ (small cap market) will in our view change
this situation, since we believe that the former (UBS) Head of Life Science Investment bank-
ing, Marc Saad, now CFO of Cytori, will be ―capable enough‖ to explain the companies busi-
ness model to US analysts and investors.
Pros / Cons for an investment in Cytori Stock
"IDE" regulatory appeals significantly more
+ attractive in terms time, approval, costs, bu- - IDE regulatory not yet accepted by FDA
ADAS cells superior as source for regenera-
+ tive cells
- Poor revenue stream up till now
Significant "IDE" experience with almost 50 Additional financing via equity placement ex-
Adult stem cells avoid ethical political discus- Regenerative Medicine still need a long way
- until commercialization
+ No Danger of allergic reactions/infections
Pool of very skilled, experienced and enthu-
+ siastic scientific staff
Financing of Clinical Trials for "Cardiovascu-
+ lar-Therapy" already secured
+ Strong institutional shareholder base
Anti-dilution / Shareholder oriented capital
As the above chart indicates, Cytori has been declining in a downtrend for almost 41/2 years.
The stock bottomed in January with an all time low of 1.75€. A reversal has been initiated
then. After having announced the $10 per share equity placement with Olympus and the in-
tention of Gagnon Securities to acquire up to 20% of Cytori´s stock in May, the stock broke its
downtrend and started a rally until €4.6. The OBV shows continued capital accumulation in
this stock since the beginning of the year. If Cytori´s stock can break through the major resis-
tance at €5.18 all hurdles are broken until round about 12€. The theoretical price target based
on the bullish wedge is €15 some time in 2006.
Cytori´s stock has consolidated this rally in the pattern of a symmetrical triangle since the
middle of June. Actually it has just left the upper side of that triangle. The MACD and Slow
Stochastic gave a fresh buying signal which had been a reliable indicator of midterm bottoms
in the past. Volume is in steady rise since the beginning of May but has been declining during
the recent consolidation.
Next small resistance is at €4.45 which – once broken – should leave room to €5.20. Trend is
still in good condition.
Upcoming Catalysts for next 6 months
- NASDAQ Small Cap Listing
- European CE Certification for Celution
- Announcement of first major commercial Partnership (Olympus)
- Begin clinical studies in Europe in early 2006
- Reporting of Profit in 3rd Quarter (Nov 15), due to 5,6 Mio $ credit to income.
Summary / Conclusion
The conclusion of the above analysis is relatively simple:
Based on peer group comparison the value of Cytori stock at the German stock exchange is
extremely low, which is most likely to disappear within a relatively short timeframe as soon as
the stock is also listed on a respectable US exchange This is expected to happen within 2 to 6
weeks from the time of writing this report. A tripling of present value would be a logical con-
Further upwards momentum is likely to occur based on the anticipated partnership with Olym-
pus to be announced within 2005, from which we expect a considerable cash flow, because of
the appreciation by the partner of the significance of the acquired technology.
A logical development from this event would be that analysts and institutional investors in the
US would take a closer look at the prospects of this technology and discover the strong intel-
lectual property position on the core extraction technology, the encouraging pre-clinical re-
sults in a number of important indications and foremost, the relatively short timeframe re-
quired for commercialisation thereof, because of its unique and practical approach.
We look forward in welcoming you as co-shareholders in the stock of the ―future leader in re-
How can I buy Cytori Therapeutics shares in the United States?
Contact a U.S. broker with the following information: Cytori Therapeutics Shares are traded
on the Frankfurt Stock Exchange in Germany in the Prime Standard Segment. The security ID
number is ISIN USU233441018 or WKN A0ETV5. Otherwise you have to order the Pinkies
(cytdf.pk) until they are listed on the NASDAQ Small Cap.
www.cytoritx.com, www.hypeandhope.com, www.wikipedia.com, www.ifats.org,
www.nih.gov, www.fda.gov, www.sec.gov, www.wallstreet-online.de, www.bloomberg.com,
www.nasdaq.com, finance.yahoo.com, several Company presentations, conference calls and
conversations with management and investor relations.
Disclaimer: The information in this report was written by Sheepshead and Gulliver, and was derived from sources they
consider to be reliable, but whose accuracy cannot be guaranteed. This report should be considered informational in
nature and should not be construed as investment advice. No investment decision should be based solely on its contents.
All investors should do their own Due Diligence before making any investment decision. The securities referenced are
speculative in nature and may not be suitable for your investment objective. We retain no liability for any decisions
made based on material contained in this report.