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Cytori Looks for Fat Profits

Melissa Davis

The stem cell industry is known for making big promises. But the pledge made by Cytori (CYTX Quote) -- an obscure name in this sometimes overhyped field -- really stands out.

"Our goal is to be not only one of the first revenue-generating stem cell companies but also to be the first profitable one," says Cytori CEO Christopher Calhoun. "It's something we're targeting to do sooner rather than later. ... You won't hear that from others."

To be sure, Cytori seems to face a shorter path than most. As rival stem cell players, such as Geron (GERN Quote), pursue new drugs that could be years -- if not decades -- away, Cytori is seeking near-term approval of its own products through the less arduous process established for medical devices. The company hopes to secure regulatory permission to start selling its first breakthrough treatment, involving stem cells extracted from a patient's own fat, by the end of this year.

Cytori has invented a device that can withdraw stem cells from patient fat for re-use elsewhere in the body. The entire process takes around an hour and, at $2,500 to $10,000 per treatment, looks downright cheap for stem cell-based therapy.

Still, Cytori plans to dominate its first market by addressing an unmet need. If all goes as planned, the company will soon roll out a novel treatment for breast cancer patients seeking reconstructive surgery following partial mastectomies -- or lumpectomies -- that remove tumors but spare the rest of the breast. Those partial breast removals currently leave patients with scars, radiation damage and other reminders of their cancer.

"After a complete mastectomy, an implant is a very viable reconstruction option," says Eric Daniels, a surgeon who serves as senior director of business development for Cytori. "But with partial breast removal, that isn't the case. There are zero options for these patients.

"When we look at the landscape, we see a real opportunity to help these patients" going forward.

Indeed, Cytori portrays its stem cell-based treatment as ideal for this underserved group. The company describes fat as "the richest source of stem cells" in the entire body. Moreover, the company says that it takes a limited amount of fat -- "less than half a Coke can full" -- to perform its rapid therapy.

Unlike fat itself, once used with limited success for breast reconstruction surgery, Cytori says that fat-derived stem cells bring needed blood supply to reconstructed breasts. Thus, the company says that breast reconstruction surgery patients should finally have an option that will work and actually last.

WBB Securities analyst Stephen Brozak looks for Cytori to begin marketing its new therapy late this year and start racking up sales of $85 million annually from the treatment by 2010. Brozak has based his $7.20 price target on Cytori's stock -- which currently fetches $5.81 a share -- on future revenue from the company's breast-reconstruction application alone.

Yet Brozak believes that Cytori could also chase a breast-augmentation market that is nearly three times as large. For its part, the company plans to do just that.

"The breast [application] is a $100 million to $300 million opportunity" overall, Calhoun says. "That's probably a realistic, reachable revenue number for us. ... We could absolutely serve that size of a market."

Still, Cytori expects to pursue an even bigger opportunity down the road. Right now, the company is enrolling patients in a study designed to test its stem cell treatment for cardiac ischemia, a common ailment characterized by poor blood flow. That therapy, unlike current drugs on the market, aims to regenerate heart tissue rather than simply slow its deterioration.

Cytori plans to first examine the safety of its cardiac therapy -- with data available for presentation in the second half of next year -- and follow up with pivotal studies to determine its effectiveness after that. Those tests, involving full-blown randomized trials, will take some time to complete. But if all goes well, the company hopes to secure regulatory approval of its cardiac application in Europe within three years and in the U.S. within four.

Calhoun believes the results could be worth the wait.

"It depends on how good the data is," he admits. "But if we can get 3% to 4% of the market share (for cardiac ischemia), that would be $1.5 billion in revenue even at our price point ... That's an enormous market."

Cytori acknowledges that other companies, such as Baxter (BAX Quote) and Osiris (OSIR Quote), are pursuing that massive market as well. However, Cytori claims that it ranks as the only company focused entirely on device-related treatments -- involving no drug therapy -- that can bring regulatory approval within a few short years.

Cytori has secured a strong manufacturing partner in the meantime. Japanese-based Olympus has invested some $45 million in a joint-venture with the company -- and, moreover, it hasn't stopped there.

"Olympus has more than 100 people working on our technology every day," Calhoun says. "What we hear from our partners and potential partners is that we have real products and a clear and profitable business model. That really gives them a compelling reason to want to partner with us."

Brozak, for one, sure likes what he sees.

"This is a stem cell company that will have sales by the end of the year," says Brozak, whose firm has provided financial consulting services to Cytori in the past. "So this is the real deal -- here and now."