Our timing into Isolagen (ILE) has sure been bad and the stock remains one of our worst performers. However, we still remain optimistic about this biotech over a 3-year time horizon, even if the prospects of additional financing actions may put pressure on the stock for some time. In this post, we’ll update you on some of the more important events related to the Isolagen (ILE) situation.
The UK Experience
Soon after our write-up of the Annual Meeting, ILE announced the closure of its UK facility to focus exclusively on the US market. We view this development as very positive, because the UK operation was draining cash from the company and there were serious execution issues. A recent article in the UK tabloid Daily Express perhaps best summarizes the UK failure. Sure, this was a hatchet job, but we think it gets to the core of the business failure:
“Richard Arnott, Isolagen’s UK sales director, said the company had sustained massive losses because the process of growing and storing cells was expensive. The success of the treatment, he said, depended on the skill of the doctor who administered it.”
The rest of the article is not really worth quoting, but you can follow this link for more juicy details.
Our take: Failure is at times a prerequisite for success. We believe that ILE management has learned many valuable lessons from the UK debacle, which they will use to increase the odds of ILE’s success in the US Market. Notably, in advance of any FDA rulings, ILE has already hired experienced manufacturing executives to help lower the company’s costs of production and storage.
JPM Presentation and What To Look For in 2007
Surely enough, both cost of goods and physician training are issues cited by Isolagen itself in the CEO’s recent presentation at JPMorgan’s Healthcare Conference. This is our second notable event. If you are just joining the story, the JPM Presentation is a good way to get yourself up to speed on the state of the company (in combination with our previous write-ups). A PDF of the presentation is available by clicking here.
Of particular note, the key near-term milestones, which may drive the stock price over the next year or so, are identified on slide 32:
Clinical Milestones
•US “wrinkle study” fully enrolled—all subjects receive all injections—move program into data collection phase.
•Seek protocol acceptance/ initiate full face aesthetics study
•Negotiate best outcome with FDA so to start burn & acne scar clinical programs
•Finalize dental program strategy
Operating/Business Milestones
•Launch Agera® Business successfully
•Continue to improve cost efficiency and quality in manufacturing process
•Finalize UK closure
•Sell Swiss facility
•Complete capital structuring plan
•Make decisions on potential acquisitions/collaborations/partnerships
These bullet points give us the best outline of what developments to anticipate in 2007. We think that aside from positive clinical trial results, potential near-term upside is hidden in both the Agera roll-out and in acquisitions/partnerships which, judging from the language used in the slide, are in process but not yet finalized.
We should note that the company’s estimates for the potential of Agera are well beneath our assumptions, and as such we have tempered our enthusiasm for this product line. It’s difficult to understand the rationale for Agera, unless one assumes that ILE will make other acquisitions in the non-FDA approved product area.
Implications of the Recent Financing
As you may already know, a shelf registration is in the works for ILE and the company announced that it will be looking to raise up to $50M after it files its form 10-K in March. With a present market cap of $80M, current shareholders can expect some serious dilution. The funds are ostensibly being raised “for working capital and general corporate purposes,” but we take that to mean acquisitions. We view this financing as a painful, but necessary step in the company’s turnaround.
The Valuation
We are no closer to nailing down a specific valuation of this stock, and we would note that valuing biotechs tends to range from extremely difficult to nearly impossible. Subscribers should also note that in our original writeup we cautioned that in the worst case ILE could easily go to $0.
However, we would also point out that when Mr. Teti, the new CEO and Chairman, was brought in to turn ILE around he received options with a $1.88 strike price. We view this as a floor for the stock price because we still think it is doubtful that someone of Teti’s stature would have joined this tiny company without expectations of significant upside. Therefore the closer we get to his option price level, the more bullish we will feel about these shares, provided that no serious setbacks occur in the interim.
On the upside, we would note that biotechs can be sold for seemingly astronomical sums, even when there are negligible historical sales. The reason for this is that if trials prove successful there is no need per se for a biotech company to actually generate any sales as a potential buyer could generate significant revenue for new products via existing sales channels. With the potential for three late stage, i.e. Phase III, products, representing very large market opportunities, in ILE’s portfolio by year-end 2007, the company seemingly has enough in the pipeline to generate significant interest from larger pharmaceutical companies and at the same time cushion the impact of unfavorable results in one particular product line.
In sum, we still view ILE as a very interesting opportunity for those willing to hold on for the ride over the next 2-3 years as ILE brings its pipeline of therapies to market. The short-term bumps can be difficult to stomach, for sure. This situation once again reinforces our contention that a well-diversified portfolio is the only way to go when dealing in volatile microcap stocks.
Special thanks to Toby Shute for contributing to this write-up.
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